If you are considering bankruptcy, then we recommend that you call our office and schedule a consultation with a Chapter 7 bankruptcy lawyer. This is a complex legal process that must be completed in a particular way to ensure that you receive a discharge of your debt. It also takes an experienced bankruptcy attorney to protect your rights and your property while filing for bankruptcy. With that in mind, many of our clients ask what happens to their tax return after they file for bankruptcy. The answer depends on when you file, how you file, and when the funds are received.
Can I Keep My Tax Refund in Chapter 7 Bankruptcy?
There are many factors that determine whether or not you can keep your taxes when filing for bankruptcy. Chapter 7 bankruptcy is a liquidation process. This means that the bankruptcy trustee can use your assets, including your tax refunds, to pay off your debt. Therefore, the timing of your tax filing and receipt of your tax refund becomes extremely important when filing for bankruptcy. For example, if you file and receive your refunds prior to bankruptcy, then the trustee wont be able to go after those funds if you already spent it on necessary living expenses. This can get confusing and as a Chapter 7 bankruptcy lawyer, we can give you an answer based on the specifics of your situation.
Use Exemptions to Keep your Tax Refund
Another way to prevent trustees from taking your bankruptcy refund is to use available bankruptcy exemptions to save the money. You are entitled to a certain amount of exemptions which we can go over with you during a consultation. The trustee cannot seize anything that is protected by exemptions. There are also ways to apply your refund toward necessary expenses.
Update your Withholding
If you file for bankruptcy in the middle of the year, then you can also adjust the withholding on your paycheck to maximize your take-home pay. For example, if you currently claim 3 exemptions, then you can change it to 6 and receive more money on every check. You need to speak with an accountant or CPA. They will help you decide on the correct withholding so as not to owe taxes. Adjusting your withholding can help with your immediate cash flow. It also ensures that you do not end up with a large refund check that creditors might be able to take.
Due to the complexity of the issue, we recommend that you schedule an appointment with a Chapter 7 bankruptcy lawyer in our office. At the appointment, we can go over the best time for you to file for bankruptcy. We provide guidance to preserve as much of your tax refund as possible.
NOTE: This is for informational purposes only and does not constitute legal advice.