Tax Refunds and Bankruptcy

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If you are expecting a tax refund and have also recently filed for bankruptcy, or will be filing for bankruptcy, it’s important to know how that tax refund will be treated.

Tax Refund as an Asset

When a person files for Chapter 7 or Chapter 13 bankruptcy, any assets that are available as part of the bankruptcy estate are available for creditors. Just like income, a tax refund will automatically be considered the property of a bankruptcy estate. It should be noted that, while a tax refund is considered an asset, there is a way to keep the refund from going straight to creditors.

Placing the Refund in a Bankruptcy Petition

When dealing with taxes and bankruptcy, you’ll always want to work or at least consult a bankruptcy attorney. Just as some assets are considered exempt from bankruptcy, tax refunds can also be considered, either partially or fully, exempt. A bankruptcy attorney will be able to advise you on your state’s exemptions, in additional to federal exemptions.

Often times the exact tax refund amount is not known. In these instances, a bankruptcy attorney might list an “unknown amount” unless the attorney determines it will interfere with the exemption limits. In that case, an attorney might decide it is better to wait to add the tax refund to the petition after receiving the money.

A debtor is only allowed to file a certain amount of exemptions. This means that a debtor might decide to list the refund as an exemption instead of other bank accounts or jewelry.

Waiting for Tax Refund

If a bankruptcy has not yet been filed, and a debtor is able to wait until they receive the tax refund, it might be a good option. This is especially true if the refund amount is expected to be significant. Typically, substantial refunds are spent on necessities, including mortgage payments or medical expenses. Typically a court will not object to refunds being used in this way, but it’s always important to discuss these instances with a bankruptcy attorney.

Working with a Bankruptcy Attorney

Bankruptcy can be an overwhelming process. That’s why we advise that you work with a phoenix business bankruptcy lawyer that is familiar with various debt repayment options. We are committed to helping our clients understand their rights and options under the bankruptcy law and developing the debt relief solution that makes the most sense for each individual. We invite you to call (602) 648-3274 or contact our Arizona office to schedule a free initial consultation.

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668 N. 44th St., Ste 320, Phoenix, AZ 85008

(602) 648-3274

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