Tax Refunds and Filing Bankruptcy
It's that time of year again where mopst of us are eagarly awaiting our W2s so that we can file our tax returns and hopefully receive a nice tax refund. If you are considering filing for bankruptcy, there are some important considerations to make in regards to filing your tax return and whether or not a refund would be property of your creditors.
Generally speaking, when you file for bankruptcy protection, your creditors are entiteld to a portion of your tax refund for that year that you filed bankruptcy. The amount creditors are entitled to depends on the month that you file for bankruptcy. Assume for example that you will be receivinig a $12,000.00 tax refund for your 2018 tax return and you filed for chapter 7 bankruptcy in June of 2018. In that situation, your creditors would be entitled to 50% of your tax refund because you filed in month 6 of 12. The amount of your tax refund that creditors would receive is prorated according to the month you file.
What a bout chapter 13 bankruptcy? In chapter 13 bankruptcy, you usually will have to surrender your tax refund each year you are in your chapter 13 plan. The year that you file however, you should only have to surrender a prorated amount.
How do you prevent or minimize the amount of your tax refund you surrender to creditors? In a chapter 13 case, you could propose a plan that does not include surrendering your tax refunds. The trustee might not go along with it, but it doesn't hurt to ask. In a chapter 7 bankruptcy case, you could wait to file your bankruptcy until after you have received and spent your tax refund on allowed expenses. This is the course of action that most debtors take. Be sure to speak to a bankruptcy attorney before you take this course of action, however. You do not want to spend your money on something you are not allowed to. Please call us at 480-355-1377.
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