Will You Have to Relinquish a Tax Refund to Get the Protection of the Bankruptcy Laws?
You’re struggling to meet your financial obligations, whether due to the loss of a job, a divorce or an unexpected illness or injury. You can’t see a way out other than through a personal bankruptcy filing. There’s just one glitch…you have a pretty substantial refund coming from your personal income tax return. Will you lose it? Will the bankruptcy trustee take it to satisfy your creditors? Is there any way you can protect it, so that you can use it for food, gas and other necessities?
Can the Bankruptcy Trustee Take Your Income Tax Refund?
Absolutely. In fact, with filings done within the first 4-6 months of the year, bankruptcy trustees tend to be on the lookout for tax refunds, as they are an easy way to obtain cash to satisfy creditors.
Can You Legally Keep the Trustee from Taking Your Refund?
The best answer is “maybe.” There are two ways that you can have access to the full amount of your tax refund check:
- You receive it (and spend it) before you file for bankruptcy
- You use either the state or federal exemptions to protect the amount of your refund
When you file for protection under Chapter 7, you’ll have to relinquish any property not protected by exemptions to the trustee. That includes any funds in bank or similar financial accounts. If you have received a tax refund, but haven’t spent it, it may be taken by the bankruptcy trustee, unless you can protect it with an available exemption.
If you receive a refund before you file, you must spend it on “necessary” items in order to keep it out of the bankruptcy estate. That includes rent, mortgage payments, utilities, car, food, clothing, medical care and education. If, however, you spend your refund on luxury goods or to pay off preferred creditors, your petition may be denied because of bad faith.
Contact an Experienced Rockwall, TX Bankruptcy Attorney
At the Law Offices of Carrie Weir, all potential clients are entitled to a free initial consultation. To arrange an appointment, contact my office online or call 972-772-3083. I handle Texas personal bankruptcy filingsin Kaufman County, Rockwall County, Collin County, Dallas County, Hunt County and the surrounding counties.
