I Get My Tax Refund in Bankruptcy, Right?

27 Apr I Get My Tax Refund in Bankruptcy, Right?

Maybe. It depends. Do you owe the IRS any prior monies? Can you claim the monies due to you as exempt?

Now, even if the money is exempt, you are no longer safe. Prior to the new bankruptcy legistlation of BAPCPA in 10/05, it used to be that your tax refund was generally protected when you filed bankruptcy so long as you could claim it exempt.

By exempt, that means that either state or federal laws protected this refund amount up to a reasonable amount. Only in certain situations, such as when you owed recent taxes, generally, within the last 3 years, that there would be any issues as to protection.

But with BAPCPA, the laws changed with the enactment of 11 USC 362(b)26 which now allows the government to exercise its setoff rights to any prior taxes. This means that even if you owe a tax that is otherwise dischargeable, and if you have a tax refund coming back to you, then if you file bankruptcy, you will still lose that refund to the government under their new setoff rights.

So your tax refunds are generally no longer protected and filing a bankruptcy asap will not necessarily mean that you now get your tax refund back!

So what’s the bottom line? Get your tax refund first, then file bankruptcy!

Written by Michael G. Doan

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