There is nothing more uncertain and stressful than financial turmoil and instability. Many people believe that they will lose everything if they file for bankruptcy and that their credit will be ruined for years afterward. The truth is that the bankruptcy code provides an efficient and fair system to alleviate financial stress of the American people and to give them a fresh start. The two main bankruptcy options for individuals are Chapter 7 and Chapter 13. Your unique situation, including how much money you make, what assets you have, and what types of debt you have will determine which chapter you qualify for and which best suits your needs. In a Chapter 7 bankruptcy most unsecured debts are wiped out and non-exempt property is liquidated to pay those creditors. With Chapter 13 bankruptcy your debt is restructured in a way that allows you to pay back some or all of your debts under a plan and over a certain time limit.
Now, how do your tax refunds and tax returns figure into a bankruptcy case? When you filing for bankruptcy the trustee assigned to your case will need to see your most recently filed tax return so they can compare the income that was reported to the amount listed on your bankruptcy schedules. Additionally, when you file a bankruptcy case you need to identify all of your assets, including those assets that you are entitled to receive at a future date. This includes a tax refund that you will get once you file a tax return or once the state or federal agencies process and issue you a refund. If you are owed or entitled to a tax refund, that asset needs to be listed in your bankruptcy paperwork and exempted, or protected, to the extent the law allows. Exemptions allow you to keep all or part of an asset so that a trustee does not pay it out to your creditors.
When you file for bankruptcy, the tax refund is an asset that a chapter 7 or 13 trustee may try and use to pay off your creditors as part of a liquidation or repayment plan. Therefore it is very important that you let a bankruptcy attorney know the status of your tax refund. Filing for bankruptcy does not mean that you will automatically lose your tax refund, but it can if you do not know how to protect it. Depending on your other assets you may only be able to protect the refund after you have received it and deposited it into a bank account. In other cases you can protect it before you even file a bankruptcy case.
If you file and receive your tax refund prior to filing a bankruptcy case, then you can use that money to file your bankruptcy. Many bankruptcy filers use this source of income to pay unexpected fees like attorneys fees to be able to get their case filed faster. If you didn’t think that you could afford to hire an attorney, contact us today to discuss payment plan options and using other funds, like a tax return, to help get your case filed.
Another thing to keep in mind is when you receive a tax refund after you file a Chapter 13 bankruptcy. When you file a Chapter 13 you pledge all of your disposable income to be used to repay some of your debts as part of a structured repayment plan. This means that your monthly plan payment will be the amount of income that you have left after paying regular expenses. If you get a tax refund based on overwithholding during the year, then you may be required to pay all or a part of your tax refund over to the trustee while you are in the repayment plan. If you have not yet filed for bankruptcy and are anticipating receiving a tax refund, then you may be able to exempt the money and keep it to pay for unexpected expenses or for your bankruptcy attorney. Your bankruptcy attorney will also advise you to adjust your withholdings to avoid getting large tax refunds that will go towards repaying your debts in your bankruptcy case.
In both cases, whether you filed for Chapter 7 or Chapter 13 bankruptcy, the trustee appointed to you case will be making decisions as to how your tax refund will be used. In both scenarios, there are ways to keep all or parts of your refund and situations in which you will be required to turn over the refund completely in order to pay back debts. When you file for bankruptcy there are different situations that you may come across depending on your unique circumstances. This is why it’s important to work with an experienced bankruptcy attorney who can help you navigate the process and offer advice that is in your best interest. For example, if you have not yet filed for bankruptcy, but are planning to within a year, then you can actually spend your anticipated tax return on essential things like rent, mortgage, car payments and even for your bankruptcy attorney. If you spend it on material or luxury items or to payback other debts, that may create issues in your bankruptcy case and your ability to receive a discharge.
If you are considering filing for bankruptcy, we encourage you to contact our team at Gale, Angelo, Johnson & Patrick P.C., for assistance. We are highly experienced in consumer bankruptcy law and can support you through the process from start to finish. Please don’t hesitate to contact our office f if you have any questions – you can fill out the form on our website or call us at (916) 290-7778.