The Do's and Don'ts After a Car Accident

Chapter 7 Bankruptcy And Your Federal Tax Return: 4 Key Points To Keep In Mind

9 February 2017

Yvonne Russell

It's tax return season—but for a lot of people, this is also the time when they're right in the middle of getting ready to make their bankruptcy filing. If you're expecting a hefty tax return, you may be in for a surprise or some possible complications. This is what you should keep in mind.

1.) Your prior year's tax return belongs to your bankruptcy estate because it was money that was technically yours prior to the time you filed for bankruptcy. It isn't money that you are due now because it's just a refund of an overpayment that you made to the IRS during the previous year. This is true even of refunds that exist solely due to special programs where you didn't pay in the first place—like when your return is based solely on funds from the Earned Income Tax Credit.

2.) You may be able to claim your return, or part of your return, as exempt. While there's no specific exemption that allows you to specifically keep a tax return, many states have wildcard exemptions that will apply to anything up to a certain monetary value.

3.) Claiming the tax return as exempt may let you keep the tax return, but it could cause other problems. Depending on the circumstances (and how large your return is), the trustee could choose to see that as income that boosts your yearly income—especially if you get pretty regular returns. That means that while you can keep the big check, its value may be disbursed across the year and used as part of your income for figuring whether or not you meet the Chapter 7 income requirement, or means test. If you no longer do, you might be forced into filing Chapter 13 instead, which would require you to repay part or all of your debts.

4.) If you haven't filed for your bankruptcy yet, and you decide to wait until after your tax return is received and spent, there are only a couple of ways to do that without risking the ire of the bankruptcy judge. First, you can spend your refund on necessities, like food, shelter, your mortgage, medical expenses, clothing, even household maintenance and repairs.

This is not the time, however, to take the family trip to Disneyland and try to justify it later. Your second choice is to use your tax refund to pay for your bankruptcy fees and the bankruptcy attorney. Those are both time-honored methods of using the tax return that won't get you into trouble.

For more information on how to handle a tax return while filing Chapter 7 bankruptcy, talk to an attorney today, such as those found at Price James S & Associates.

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