What Happens To a Tax Refund In Bankruptcy?

Bankruptcy & Tax Refunds
Categories : Bankruptcy

During tax season, many American households are looking forward to receiving their refund from the IRS1 in the mail or in their bank account. However, if you have filed for bankruptcy or are planning to file for bankruptcy in the near future, you may worry that your tax refund is in jeopardy. Whether or not you will get to keep a refund depends on several factors and a bankruptcy attorney can evaluate your situation and advise you on the fate of your tax refund.

Timing of bankruptcy filing is important

Whether or not your tax refund will become part of the bankruptcy estate that may be seized by the trustee largely depends on when you filed bankruptcy. For example:

  • A refund for the tax year prior to filing for bankruptcy – unspent funds will be part of the bankruptcy estate and may be used by the trustee to pay your creditors.
  • A refund for the year in which you filed bankruptcy – the refund based on the income prior to bankruptcy filing will be part of the estate, but you will be able to keep the refund for the income earned after your filing.
  • A refund for the year after filing for bankruptcy – you will be able to keep the full refund.

Note that, in all situations, only unspent money can be used as part of the bankruptcy estate to pay your creditors. For this reason, many people spend the money before filing for bankruptcy. However, you cannot protect your refund by spending it on luxury items. There are approved expenses such as food, mortgage payments, car payments, medical care, clothing, education, utilities, and other similar practical uses. You may also be able to use an exemption2 to protect a refund.

Contact an experienced St. Louis bankruptcy attorney for a free consultation today

If you are considering filing for bankruptcy, it is only natural to have concerns regarding your assets and property. Experienced bankruptcy lawyer Kenneth P. Carp can answer all of your questions and address any reservations or concerns you may have about the bankruptcy process. If you are struggling financially, please do not hesitate to call our office at 314-380-5496 to discuss a possible case today.