Will Delaying My Bankruptcy Filing Help Me Keep My Tax Refund?

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I'm about to receive a large tax refund. Should I delay my bankruptcy filing?


In bankruptcy, anticipated tax refunds are considered assets just like your other property. If you can’t exempt your tax refund, the bankruptcy trustee can take it if you file for Chapter 7. As a result, it may be in your best interest to wait and file for bankruptcy after you receive and spend your refund.

Read on to learn more about how delaying your bankruptcy can help you keep your tax refund.

Tax Refunds Are Property of Your Bankruptcy Estate

When you file for Chapter 7 bankruptcy, your assets become property of the bankruptcy estate. This includes assets you are entitled to but haven’t yet received such as an anticipated tax refund (whether you have filed a tax return or not). As a result, the Chapter 7 trustee can take your refund and distribute it among your creditors unless you can exempt it in full. (To learn more, see What Property Is In Your Bankruptcy Estate.)

Exempting Your Tax Refund May Be Difficult

In Chapter 7 bankruptcy, exemptions allow you to protect a certain amount of your property. If you can exempt an asset, you can keep it. But how much you can exempt depends on where you live. Each state, as well as the federal system, has its own set of exemptions. (Get comprehensive information on bankruptcy exemptions, including the exemptions in your state.)

However, no matter where you live, it is unlikely that you will find an exemption specifically for tax refunds. As a result, if you want to exempt your tax refund, you must typically use a wildcard exemption. A wildcard exemption allows you to exempt any type of asset including your tax refund.

Unfortunately, not many states offer a wildcard exemption (or one that is large enough to exempt your entire tax refund). In that case, you may have to delay filing your bankruptcy until after you have spent your refund.

How Delaying Your Bankruptcy Can Help You Keep Your Tax Refund

The Chapter 7 trustee can only take the nonexempt assets you own or are entitled to as of the date of your bankruptcy filing. If you have already received and spent your tax refund, it is no longer an asset that needs to be disclosed in your bankruptcy. As a result, delaying your bankruptcy until you have spent your tax refund can allow you to avoid the trustee taking it.

If you decide to delay your bankruptcy, it is usually best to spend your tax refund on living expenses and other necessities such as rent or food. You can also use it to pay your bankruptcy attorney if you wish to hire one. However, if you purchase other assets with your refund, then you must disclose them in your bankruptcy and risk losing them unless they are exempt.

by: , Attorney

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