Bankruptcy Alphabet—T is for Tax Refunds

Bankruptcy Lawyer

The T in the Bankruptcy Alphabet stands for Tax Refunds. For so many people, a tax refund is their reward, or “found money” at the beginning of the year. It makes sense, because if you aren’t saving money throughout the year, and you get a large tax refund check, you can use the “extra money” to pay bills, buy something, or take a trip. One of the most common questions I get in talking to clients is “can I keep my tax refund in a bankruptcy?”

The answer to that question is, it depends. It depends on the type of bankruptcy you file, when you file the case, and more specific facts of your situation. In a Chapter 13, or payment plan kind of case, whether you keep your tax refund depends a lot on the local court rulings, and how the judges decide. In the Northern District of Illinois, depending on the Judge, it can vary, from the full tax refund being paid in, or tax refunds of over $1200.00 have to be paid to the bankruptcy trustee. In other cases, such as cases where you are paying bills back in full, the court will allow you to keep your whole tax refunds.

In a Chapter 7 case, much depends on when you file your case. If you file before you get your tax refund, you can protect most of it, with your “wildcard” exemption (protection) of $4000.00, which allows you to protect $4000.00 worth of your personal property. If you file after your refund is spent (on things like living expenses), you are fine also. If your expected tax refund, combined with your other belongings is more than $4000.00 per person, the bankruptcy trustee could require that you pay the money to him/her to be used to pay your bills.

Another thing to keep in mind is that in order to help your situation in the future, you need to change your tax filings so that you don’t get a large refund. While it is a great “surprise” to get a refund, it is not the best way to handle your money. Think about it, you are giving the government all that extra money for a year or more, and they hold it for you, but give you no interest. If you increase the number of dependents, the taxes taken from your check will go down. So, not only will you have more money to live on throughout the year, but also, if you are in a Chapter 13, you won’t have to worry about giving money to the trustee during your 3 to 5 year plan.

So, what can you do to keep your money, and not lose your tax refund? As you can see, there are many strategies, and, it is important to consult with an experienced bankruptcy attorney to review your situation carefully.

Daniel J. Winter
53 W. Jackson Boulevard
Suite 725
Chicago, IL 60604