Tax Refunds and Bankruptcy

Tax season is upon us, and there is only one good thing about tax season (some of the time)… tax refunds.

If you are considering filing bankruptcy, and expect to receive a refund, it will probably be protected from your creditors. When you file bankruptcy, you must list all of your assets and all of your debts in the schedules. Tax refunds, or potential tax refunds, are considered an asset, and must be exempted from your creditors.

There is no specific exemption under federal law for a tax refund. However, the “wild card” exemption allows you to protect tax refunds, among other things. The first step if you are considering filing bankruptcy this spring is to actually file your taxes and determine what your refund will be. If you don’t do this, the bankruptcy trustees may hold your case open until the amount is determined.

Once you know what your refund will be, consult with your bankruptcy attorney to determine how best to exempt it. If your refund is particularly large, you may need to spend it down naturally, over several months. If, however, your refund is more modest, it is likely just a matter of excempting it with the available exemptions under federal bankruptcy law.

A second note about taxes and bankruptcy is you must have all of your taxes for the last four years filed. If you are not required to file taxes (because you are on Social Security or have no income), this is not an issue. But, if you are required to file taxes, it must be done before you file. Otherwise, you may not receive a bankruptcy discharge. Now, the taxes must just be filed, not necessarily PAID. So, if you believe you’ll owe the IRS money (or the state or local authorities), it will not prevent you from filing bankruptcy. 

If you have any questions about your tax refund and bankruptcy, or any other bankruptcy questions, contact us at 412-414-9366. I would be happy to set up a free consultation to discuss your situation and see if I can help.

Tax Returns and Bankruptcy

Individuals filing bankruptcy must provide copies of their past two years of Federal income tax returns and the accompanying W-2s and 1099s. Also, they must have filed all Federal tax returns for the past four years that were due. I am often asked why this is so.

The bankruptcy trustees, in both Chapter 13 bankruptcy and Chapter 7 bankruptcy, want to review your tax returns for several reasons. First, it gives them an idea of how much money has been earned in the household the past several years. When you file a bankruptcy, you submit proof of your income via paystubs and verified statements. The trustee needs this information to determine whether or not you have sufficient funds to repay your creditors. Your tax returns provide further proof..

Tax returns may also show if you were making large amounts of money at some point in the past two years. This will not necessarily prevent you from filing bankruptcy, by any means. However, you may need to explain to the trustee why your income has dropped. It could be for a reason as simple as you lost your job or had a paycut.

The second reason that you must provide copies of your tax returns is that it is required under the Bankruptcy Code. The Bankruptcy Code requires you to have filed all Federal income taxes for the four years previous to the year of the filing of your bankruptcy case. In rare occasions the trustee may ask for older returns, but this is far from normal.

If you are not required to file tax returns, for instance because your only income is for Social Security or you have not worked during the tax year, a verified statement can be provided telling the trustee as much. You do not have to file just for the sake of filing.

The final reason it is important to provide your tax returns is so that your bankruptcy attorney can make sure to exempt any tax refund that you may receive. A potential tax refund is considered an asset and must be protected from your creditors. Early in the tax year, the trustees may hold open your case to see how large your tax refund will be. If your tax returns have been filed, we will know what your likely return will be, and we can protect it from your creditors.

Call us at 412-414-9366 if you have any bankruptcy related questions. We would be happy to set up a free consultation to discuss your situation, whether it involves a tax issue or not!

Protecting Your Tax Refund

Tax season is once again upon us, as we begin to receive our W2s and 1099s. Just like frigid Pittsburgh weather, we can complain… but it won’t do any good!

For many of my clients, tax refunds are an important part of meeting their monthly obligations. Tax refunds are often used to catch up mortgages, do household repairs, or buy necessities. For many Americans, tax refunds are a form of forced “savings”. Losing a tax refund could be catastrophic.

Individuals looking to file bankruptcy are therefore usually concerned about losing their refund. Luckily, bankruptcy law allows for “exemptions” which can be used to protect your property and assets from your creditors. These exemptions are not unlimited, so it is important to discuss them with your bankruptcy attorney, and to list all of your property when meeting with him or her.

There is not an exemption dedicated solely to tax refunds. However, the Federal exemptions under bankruptcy law do provide a “wildcard” exemption. Depending on how equity you have in a home (if you have one) the value of this wildcard exemption could be anywhere from zero up to nearly $10,000 for an individual.

An experienced bankruptcy attorney can make sure these exemptions are maximized. If you are looking to file bankruptcy soon, and expect to get a significant tax refund this year, you should file your taxes as early as possible so that the amount can be determined and exempted. As long as it can be exempted, you can file your bankruptcy without concern of losing it. If it goes beyond the value of your exemptions, you will need to discuss the situation further with your bankruptcy attorney.

Also, it should be noted there are things you can do with your refund that are strongly frowned upon or forbidden by the bankruptcy court. Paying back friends or family with a “preferential payment” would be one. Making a large frivolous purchase may be another. Talk with your bankruptcy before spending any of it if you have any doubts.

If you are concerned about your pending tax refund, and are considering filing Chapter 7 bankruptcy (or Chapter 13 bankruptcy), can me at 412-414-9366. Or email me and set up an appointment. With my experience, I will make sure you keep all of your refund, or as much as possible. Tax season doesn’t need to be ALL bad.

Tax Refunds and Bankruptcy

It is the middle of March, and tax season is in full swing. With only a month left to file, it's an annoyance, in the least. I'm not sure anyone enjoys preparing taxes. However, the positive side is that many of you could be receiving a tax refund. People use their refunds for different things, from splurging, to paying for repairs on their home or car, to saving for another rainy Pittsburgh day. If you are preparing to file a bankruptcy, you should keep a few things in mind this time of year.

First, if you are currently filing a Chapter 7 bankruptcy, you will need to exempt your tax refund. This is because your tax refund is considered an "asset". Under bankruptcy law, it is your property. This is confusing for some of my clients, because most people think of "property" as cars or homes or TVs. But, under the broad definition of property in the bankruptcy code, a prospective tax refund counts as well. In most case, you will have more than enough exemptions to protect your entire refund (the "wildcard" exemption is usually sufficient), but you should still let your bankruptcy attorney know. This is especially the case when you have large deductions and expect a big return.

Another important thing to remember when filing a bankruptcy during tax season is that you should NOT spend the refund until you speak with your attorney. The bankruptcy trustee could question and challenge many expenditures of your refund, especially if it is a large, discretionary purchase (electronics, TVs, etc.). Also, anything you purchase would need to be exempted. So, if you receive a return of any significance, speak with your attorney first.

If you are in a Chapter 13 bankruptcy, you should let your attorney know if you receive any return larger than a few thousand dollars. The bankruptcy trustee will probably not be interested in your return, but keep your attorney appraised just the same. Once again, the refund is an asset of your bankruptcy estate that must be accounted for.

One final note about tax refunds... they can be used to file attorney fees. If a payment plan is unfeasible for you, this may be the best time of year to file bankruptcy. My filings normally peak during this time of year. It is money well spent if it wipes out tens-of-thousands of dollars of debt, or a lawsuit. It is completely permissible to use a refund, take advantage of this option if your debt is overwhelming.

Contact us if you have any questions about your tax refund and bankruptcy.