Filing for bankruptcy can be complex, especially regarding your tax refund. If you’re considering Chapter 7 bankruptcy, you might wonder what will happen to that much-needed tax refund. Let’s go ahead and dive into the details and explore your options.
When you file for Chapter 7 bankruptcy, a court-appointed trustee distributes your non-exempt assets to creditors. This includes any tax refunds you’re entitled to but have yet to receive. However, don’t lose hope – there are strategies to protect your refund.
Strategies for Keeping Your Refund in Chapter 7 Bankruptcy
The timing of your bankruptcy filing in relation to your tax return filing can significantly impact what happens to your refund. If you’ve already received your refund, the focus shifts to protecting the cash in your bank account. On the other hand, if you’re waiting for your refund or still need to file your tax return, the portion of your overpayment attributable to pre-bankruptcy income may belong to the bankruptcy estate. However, the portion of your refund from income earned after filing for bankruptcy is yours to keep.
There are three primary ways to avoid losing your refund:
- Spend it on necessary items before you file Chapter 7.
- Adjust the amount of your payroll tax withholdings to eliminate the refund.
- Use a bankruptcy exemption to protect your tax refund received after filing Chapter 7.
Spend Your Refund on Necessary Items
If you’ve received your refund and have yet to file for bankruptcy, consider spending it on necessary items. It’s crucial to keep detailed records and focus on essentials. Acceptable expenses typically include:
- Housing expenses, i.e., mortgage payments, rent, or home repair
- Utilities
- Food
- Clothing
- Medical care
- Car expenses, i.e., payments or maintenance
- Education expenses.However, it’s important to exercise caution. Avoid making luxury purchases or paying off specific debts, as these actions could be interpreted as acting in bad faith.
Adjust Your Payroll Withholdings
If you have time before filing your tax return and the Chapter 7 bankruptcy, consider adjusting your withholdings to minimize your refund. This strategy increases your regular net paycheck while reducing the risk of losing your refund. However, be careful not to under-withhold so you do not incur a non-dischargeable tax claim. Striking the right balance can be tricky, so it’s advisable to consult with a tax professional before making significant changes to your withholdings.
Utilize Bankruptcy Exemptions to Protect Your Refund
Some states offer exemptions that can protect your tax refund. These may include cash exemptions, bank account protections, or tax credit exemptions. Additionally, some states provide a “wildcard” exemption that can be applied to any asset, including a tax refund. The availability and extent of these exemptions vary significantly from state to state, so it’s essential to understand the specific laws in your jurisdiction.
Importance of Prebankruptcy Planning
Before filing for Chapter 7 bankruptcy, it’s critical that you consult an attorney who is well-versed in bankruptcy and tax law. An experienced tax-bankruptcy attorney can help you understand local exemptions and navigate the complexities of bankruptcy law. They can also assist in developing a strategy to protect your assets, including your tax refund while ensuring compliance with federal and state laws. Proper pre-bankruptcy planning can make a significant difference in the outcome of your case.
Count on TWG to Protect Your Assets in Bankruptcy
At Tax Workout Group, we specialize in the intersection of tax and bankruptcy law. Our expertise includes in-depth knowledge of IRS practices and procedures, as well as a comprehensive understanding of federal and state tax laws related to the US Bankruptcy Code. We can help you strategically time your bankruptcy filing to maximize debt elimination, including tax debt while keeping the IRS and state taxing agencies at bay.
Our firm offers streamlined, client-friendly processes to make your experience as smooth as possible. We provide access to many online features, including a client portal, regular video meetings, and efficient document and file handling procedures. This approach allows us to serve you effectively by minimizing time, fees, and costs. Need help navigating this complex process? By working with our highly rated, experienced tax-bankruptcy attorneys, you can ensure that you’re taking the proper steps to protect your assets and secure your financial future. By acting now and seeking professional guidance, you can gain insight and take more control of your financial future. Let us help you navigate the complexities of bankruptcy and tax law, ensuring that you make informed decisions every step of the way.
You can start today by scheduling a free case evaluation.
