Can I Keep My Tax Refund After Filing for Chapter 7?

For W-2 employees, April is its own holiday season—tax refund season. And if you’re in debt, you might be planning to use your refund to pay down some of those bills. Everyone’s situation is a little different, but bankruptcy lawyers generally recommend saving that tax refund for a rainy day or using it to file for bankruptcy if your debt is prohibitive. By seeking the counsel of an experienced attorney, you’re more likely to hold on to that tax refund, even if you file for Chapter 7 bankruptcy.

Your Bankruptcy Estate

In Chapter 7 bankruptcy, all of your assets become the property of your bankruptcy estate once your lawyer files the petition. The trustee for your case will control these assets, some of which will be used to pay creditors. In most cases, you can keep any assets you acquire after you’ve already filed the petition. Tax refunds may be treated differently. The logic behind this is that your refund accrued during the previous tax year, before you filed for bankruptcy.

Your Tax Withholding

You might not need to file the petition right away. If you plan to delay filing until the following year, then you can adjust your withholding on your W-2 now. Adjust your withholding to reduce your refund, yet still cover the taxes you owe. You’ll get bigger paychecks during the year, and if you do still get a tax refund, it’ll likely be too small for your trustee to bother with.

Your Spending Options

If it’s too late to adjust your withholding and you’ve already received the tax refund before you file, then you can legally spend it on necessities to keep it out of your bankruptcy estate. Necessities include mortgage or rent, utilities, food, medical care, education, and car payments.

Your Bankruptcy Exemptions

Your tax refund might arrive after you’ve filed, but you might still be able to keep it. Talk to your lawyer about including your refund as an exemption.

The bankruptcy attorneys at Cutler & Associates, Ltd. have the answers to all of your questions regarding bankruptcy and financial recovery. Even if you aren’t sure whether you do want to file for bankruptcy, we’ll give you all the information you need to make your decision.