Can I Lose My Tax Refund If I File Chapter 7 Bankruptcy in New York?

18 Oct Can I Lose My Tax Refund If I File Chapter 7 Bankruptcy in New York?

If you file a Chapter 7 in New York, you may lose your tax refund depending on a wide variety of issues that can determine whether or not you can keep some or all of your refund. 

1.  If you own a home and have protected it by taking a homestead exemption (which is now $50,000 per debtor in New York), you are not allowed to take a cash exemption in New York.  Any refund that is due when you filed the bankruptcy will have to be paid to the Chapter 7 trustee. 

2.   If you filed a joint tax return with your spouse, but only one of you filed the Chapter 7, the trustee will normally only take one-half of the refund. 

3.   If you filed your bankruptcy after January 1, but before you received your refund, the Chapter 7 Trustee will take your share of the entire refund. 

4.   If you filed your bankruptcy petition before January 1, the Trustee may take a pro-rata portion of the refund.  For example, if you file bankruptcy on September 30, three-quarters of the year is considered pre-petition and one-quarter post petition.  In this example, the Trustee can take three-quarters of your refund, and you get to keep the other one-quarter.

5.   If you get your tax refund before you file your bankruptcy petition, and if you spend the refund prior to filing, the trustee will not go after it unless you have used it to make a preferential payment to one or more creditor, or you have given the refund to another person without getting something with about the same value in return.  An example of a preferential payment is where you repay a relative, or pay off one of your credit cards.  But if you use your refund for necessary and reasonable expenses such as fixing your car, repairing the house, catching up on your mortgage or paying your regular bills, the Trustee should leave you and your refund alone.  Very often debtors will borrow the legal fees for the bankruptcy from a friend or relative with a promise that they will be paid back from their tax refund.  Oops.  The Chapter 7 Trustee will go after the relative and take back the entire amount paid to the relative as a preference.

6.   If you do not own your home, or choose not to take the homestead exemption, you can claim a cash exemption.  While each state’s allowable exemptions differ, in New York you can usually exempt up to $2,500 per debtor.  You can apply that exemption to cash, deposits or anticipated tax refunds.  Any excess above the exemption allowed must go to the Chapter 7 trustee. 

Future tax refunds, beyond the year in which you file your bankruptcy petition are not subject to being taken by the Trustee.

See: Can I Lose My Tax Refund If I File Chapter 13 Bankruptcy in
New York?

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Peter Orville is a bankruptcy lawyer in Binghamton, located in the Southern Tier of New York. He is a member and New York co-chair of the National Association of Consumer Bankruptcy Attorneys.
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