Filing for bankruptcy is one of the hardest decisions an individual will ever make. It’s scary, shatters confidence, and leaves you vulnerable to an uncertain future.
A common question many people have is what will happen to their annual tax refund if they file for bankruptcy. Individuals can file for Chapter 7 or Chapter 13, but in both cases, the bankruptcy trustee can keep your refund. The good news is that there are steps you can take to soften the blow.
Chapter 7 Versus Chapter 13: What’s the Difference
The most common type of personal bankruptcy is Chapter 7. It’s designed to give a person a fresh start.
With Chapter 13, an individual can keep their assets in exchange for agreeing to a repayment plan based on their monthly income.
Tax Refund Impact
Under Chapter 7, tax refunds for income earned before your bankruptcy filing date usually become part of your bankruptcy estate. A trustee can use any funds not protected by exemptions to pay off creditors. You’re off the hook if you get your refund first and then spend it on necessary expenses before filing.
With Chapter 13 bankruptcy, tax refunds distributed during your repayment plan are typically part of the estate and may be used to pay creditors.
How To Keep Your Tax Refund
Take advantage of the exemptions allowed by the federal and state governments.
- Take action before filing for bankruptcy. In many states, the “wildcard” exemption can be used for any non-exempt item.
- A tax refund can be used for an emergency, such as a car repair, medical bill, or broken water heater. However, you need to discuss this with the trustee first.
- Adjust your paycheck withholding so that only the necessary amount goes to the federal government. This will give you extra cash.
Filing for bankruptcy can be an emotional and overwhelming process. The attorneys at The Law Office of Todd Kushner & Associates, in White Plains, NY, can help you navigate through the maze. Call us today at 914-600-5502 or contact us online.
