Tax season is an interesting time for people filing for Chapter 7 Bankruptcy, creditors, and bankruptcy trustees alike. Especially for individuals that are entitled to receiving a refund from the IRS. The tax refund is an asset just like the money in your bank account and the furniture in your home. It is important to list your tax refund in your bankruptcy petition or to list your expected refund.
Now, just because you scored a refund from the IRS does not mean that the Trustee can jump in and take the refund. There are many steps a person can take to exempt the tax refund money or keep it from exposure to the trustee and the debtor's creditors. An experienced Chapter 7 bankruptcy attorney can assist in these matters. If you can wait to file a bankruptcy, it is often recommended to wait until later in the year to file for bankruptcy. The Trustee does not expect you to not spend the refund. If you use your refund to pay for food, mortgage payments, medical bills, maybe even attorneys fees for the bankruptcy, then the debtor is fine. However, avoid paying back your aunt for that loan you took from her last year, or you may end up having to pay the bankruptcy court that money back.
What if the refund is sitting in your bank account for a rainy day or as an emergency fund? There are certain exemptions that debtors receive so that debtors can keep their property after a bankruptcy. Depending on the amount of assets you already have, you may be able to exempt this refund amount and avoid creditors from being able to touch it.
Whatever decision you make, if you are thinking about filing for bankruptcy, it is recommended that you talk to a bankruptcy attorney regarding the tax refund issue and any other questions you may have.
