Bankruptcy Basics: Can I Keep My Tax Refund if I File Chapter 7 Bankruptcy?

07 Nov Bankruptcy Basics: Can I Keep My Tax Refund if I File Chapter 7 Bankruptcy?

It is hard to believe, but the end of the year is almost upon us, and the holiday season will be followed very shortly by tax season. So, if you are considering a Chapter 7 bankruptcy, you may be wondering whether you will get to keep that tax refund, or whether it will be seized to pay your creditors.

Here in South Carolina, consumers are lucky when it comes to their tax refunds. South Carolina provides a fairly generous cash exemption (currently $5625 per person) and the possibility of claiming a “wildcard” exemption (in property of your choosing) in the same amount. So, for many South Carolinians, unless their tax refunds are extremely large, those refunds are not assets in their Chapter 7 cases. Now, of course, like everything else in bankruptcy, there is an “it depends” clause–it depends on what other assets you have, and how long you have lived in South Carolina, and some other details. But most of the time, those exemptions just take the tax refund off the table.

Wait just one minute, though–in order to claim your tax refund as exempt, you have to disclose that you are expecting a tax refund, or that you have received one, or even that you MIGHT be entitled to receive one. If you fail to disclose the existence of the refund, you lose the right to claim it as exempt. Most attorneys routinely disclose the possibility of a refund, in an unknown amount, at least in those cases where it is normal for the debtor to receive a refund. I usually do that except in those cases where it has been years and years since the debtor was required to file a tax return.

Not every state has exemptions as generous as those in South Carolina, and you might be expected to give up some or all of your tax refund to pay your creditors. The only way to know for sure is to consult with an experienced bankruptcy lawyer where you live. But here’s the thing I used to tell my clients in the bad old days when the South Carolina cash exemption was $1000, and there was no wildcard exemption: If someone told you that you could settle all your debts by giving up one year’s tax refund, you would take that deal in a minute. So, even if your assets are too extensive to protect your refund, or you live in a state that doesn’t provide an exemption to cover that much cash, essentially what you are doing through bankruptcy is to settle your debt for the price of one tax refund.

Still seems like a pretty good deal, huh? Oh, and one of the best ways to avoid losing your tax refund in bankruptcy–use it to pay for your bankruptcy. Win-win, huh?

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