How do I protect the tax refund. In part one we discussed why the tax refund can be a problem in bankruptcy. The refund can be a part of the bankruptcy estate and the trustee can take part of your refund and pay your unsecured creditors.
Here are some tips to protect most if not all your tax refund.
1. If you typically get a large refund change your exemptions. This is a step that you can take in the months prior to filing your bankruptcy. You can increase your exemptions even in the middle of the year. This will reduce the amount of money you get as a refund. The government should not be viewed as a piggy bank. If you are seeing a bankruptcy attorney and get a large refund your probably can use the money each month. Remember a $5000 tax refund equals $400 a month in your pocket
2. Apply for Advanced Earned Income. If you receive earned income you can give your employer a W-5. This will allow you to receive your Earned Income credit monthly, weekly or quarterly. Again the money in your pocket is better then in the government pockets.
3. Do not file your bankruptcy until you know what your refund is. If you are getting a large refund then hold off filing until you have spent the refund on necessities. You can spend the money on food, clothing, medical services, car repairs, etc. Make sure you keep receipts. DO NOT PAY RELATIVES BACK. This would cause a preference and a problem with your filing a bankruptcy. The trustee will be able to get the money back from your relatives.
4. Depending on the state you live you can exempt part or all of the refund.
It is very important for you to review your situation as the year comes to a close and one the new year starts with a bankruptcy lawyer. This way you can make sure your tax refund is protect the best way possible.
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