Bankruptcy and Tax Refunds, Commonly Asked Questions

Tax season is upon us and today we are answering some common questions about bankruptcy and tax refunds.

Q: I am in a really bad financial position right now and counting on my refund to get me and my kids through a rough patch while I start a new job. I think I need to file for bankruptcy, but I’m scared that I could lose my refund to pay my debts and end up on the street. Should I file for bankruptcy before or after I file my tax return?

A: I’m really sorry to hear that you’re in that spot, but unfortunately a lot of people do get to this point.  Generally speaking, your tax refund is part of the bankruptcy estate and will require turnover to the Trustee in a Chapter 7 bankruptcy.  It is important to know that you do not have to have your refund or file your taxes for it to be counted as part of your estate.  Many Trustees will estimate the tax refund you are going to get next year and count that as a current asset (i.e. if you file bankruptcy July 1, 2015 the trustee will try to take half of your potential refund for the taxes that you will file in 2016).  In a Chapter 13 or Chapter 11 filing the tax refund in this district is not intercepted or turned over.  It will still be considered an asset though potentially increasing your plan payments.  In short, if you are expecting a refund and filing bankruptcy it would be best to wait until you receive the refund and utilize it for necessary expenses (property taxes, rent, food etc.) prior to filing for bankruptcy.  However, make sure you keep track of where the money is spent because the trustee will expect an accounting.

I really can’t advise you much further unless you’re willing to come in for a consultation – it’s free and I’m confident that we can get you through this rough patch. You might not even need to file for bankruptcy – though you should file your tax return.

Q: My spouse had delinquent student loans that he took out before we were married, but we are now in the middle of separating and also preparing to file for bankruptcy. I’ve been given notice that the government is going to garnish the money from the tax refund. That return is largely as a result of my income, and I’m going to need it since we’re going through two legal proceedings at once. Can you tell me if there is a way to protect that money?

A: Bankruptcy is stressful on its own. I can’t even imagine what it’s like to go through that and a divorce simultaneously. You have not said which chapter you’re thinking of filing under, but the second thing I’m going to urge you to come in and sit down with me so I can get the big picture and give you more accurate advice. The first thing you need to do is file for Injured Spouse Relief, under which a spouse may be able to get back their share of the refund, as they are being unjustly injured by their spouse’s debt.  Please get in touch and schedule a consultation. You’re embarking on two very complex legal situations, and need some highly specialized professional assistance.

Finally, I’m going to say that while I can answer questions from the mailbag in the most general terms, I can’t offer top-notch personalized advice until I get to talk with you in person, and get a more detailed and nuanced view of your situation. Again, a consultation is FREE. Give us a call and get the help you need and deserve.