05 Feb Save Your Tax Refund In Bankruptcy
It’s tax time again, and for people considering filing for Chapter 7 bankruptcy it is time to start planning so you can keep your tax refund. A tax refund is your money, just like money in any bank account. When bankruptcy is filed, those funds due must be accounted for in your asset list, even though you haven’t filed a tax return yet. If you have an exemption available to exempt cash, you might be able to protect and keep the refund even if you file for bankruptcy before you get it.
As Chip Parker said in the article he wrote this time last year, tax refunds that are owed at the time the bankruptcy is filed are property of the bankruptcy estate and will be taken by the Trustee if the funds are not exempt. Chip gave the following advice:
STRATEGY: If practical, file bankruptcy AFTER receiving and consuming your income tax refund. A debtor should not spend a refund on the purchase of new assets because those assets will become property of the bankruptcy estate. The funds should be used to pay ordinary and necessary expenses. Bankruptcy clients often flood law firms in the second quarter of the year because they use their tax refund to pay for their bankruptcy fees and costs. This is one of many perfectly acceptable uses of the tax refund.
See also Tax Refunds As Assets by Rachel Lynn Foley , and Reduce Your Tax Withholdings to Avoid Paying the Trustee by Chip Parker, Don’t Spend Your Tax Refund Without Speaking To Your Attorney by Wendell Sherk, and Debtors Defeat Bankruptcy Trustee in Battle Over Tax Refunds by Jill Michaux.
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