Can You Keep Your Tax Refund When You’re in Bankruptcy?

Are you thinking of declaring bankruptcy? If so, you probably have a lot of questions about which of your assets bankruptcy will affect. Many people find themselves wondering if they will be able to keep their tax refunds in the event that they decide to file bankruptcy. Here’s what you need to know about how bankruptcy affects your tax refund.

The timing of your tax refund matters.

First and foremost, you should check to see whether your tax refund consists of income that was earned before you declared bankruptcy. If that’s the case, you will not keep the income. However, tax refunds that consist of income earned after you filed bankruptcy cannot be taken from you—you will be able to keep the entire refund.

You can take steps to minimize your refund.

If you are considering filing for bankruptcy in the near-future, you may want to avoid a tax refund in the first place by simply paying exactly what you owe to the IRS. You can do this by adjusting your tax withholdings, so that your monthly paycheck will be larger.

You can spend your refund on necessary items.

If you have already gotten your tax refund, you can spend it on necessities prior to declaring bankruptcy. Necessary items include mortgage payments, utility bills, and food and clothing expenses. However, avoid buying luxury goods or trying to use the refund to pay off some of your credit cards.

If you’re in need of legal representation or other services in the Chicagoland area, it’s time to get in touch with the team at Cutler & Associates, Ltd. We have been proudly serving the community of Aurora, Schaumburg, and other nearby areas for more than three decades. To schedule a free consultation, call us today at (847) 961-4572.