Can I Keep My Tax Refund In Chapter 7 Bankruptcy
The money received in a tax refund is something many Americans look forward to. After all, it isnt often that your government mails you a check just for doing what youre supposed to do.
For those facing chapter 7 bankruptcy, though, keeping the money received from their tax refund is not always guaranteed. Typically, the determination on whether you keep your tax refund or not is made based on the timing of both your receipt of that refund and when you file for bankruptcy, but there are a few ways to help ensure that you get to keep your money.
Will You Have To Relinquish A Tax Refund To Get The Protection Of The Bankruptcy Laws
Youre struggling to meet your financial obligations, whether due to the loss of a job, a divorce or an unexpected illness or injury. You cant see a way out other than through a personal bankruptcy filing. Theres just one glitchyou 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?
The Inside Story On Chapter 7 Bankruptcy
In general, when you file for chapter 7 bankruptcy, all of your assets become part of what is called a bankruptcy estate. This is controlled by an administrative party known as the trustee. The job of this person is to gather information about your case, hold hearings regarding your case and debts, and help the creditors you are indebted to in collecting on those debts. This may involve the selling of property or other non-exempt assets you own, as well as the seizure of any money you possess.
A tax refund is treated as cash or any other monetary asset when you file for chapter seven bankruptcy. The amount of money you have on hand from this refund will go toward repayment of your bills. Any money you receive after filing for bankruptcy is yours to keep. Unfortunately, tax returns fall into a strange category of their own when it comes to qualifying as preexisting funds or newly-earned money although you may receive your refund after filing for bankruptcy, the process which rendered the refund may have taken place before the filing, thus making this money eligible for seizure by the trustee of your bankruptcy.
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Other Bankruptcy Tax Refund Issues
If we file your case later in a year , it is likely that the trustee will ask for a copy of that years tax return. I know this sounds strange since its September and you have not filed a tax return for the current year. The trustee may request a copy of the tax return for the current year as soon as you file it. He will then review the tax return to see if you are going to be receiving any refunds. If you are, he will ask for a pro-rata portion of the refund.
Since your initial appointment with the attorney may be several months before you actually file your case, we want you to plan for your bankruptcy by adjusting your payroll deductions to avoid having the trustee take your refund.
Bottom line: You should plan to have a minimal refund if possible or wait for the refund to be received prior to filing for bankruptcy. No refund means you get to keep your money in each paycheck and avoid turning over a big refund to the trustee.
Kentucky Uses The Federal Exemptions
Spending the tax refund to repay relatives or purchase a property that is not exempt creates problems. In Kentucky, you can usually safely spend a refund on food, clothes, and furniture because Kentucky uses the federal exemptions for household goods. The federal exemptions are so large that most people rarely use exceed them. Car or home maintenance is often another safe way to spend the refund because maintenance does not create an asset or increase your equity in the property.
Next, if you have any money in your bank account, you might need to draw it out or spend it before filing. Kentucky and many other states use the federal exemptions. In2022 the federal exemptions allow you to keep about $28,900 in real property. Half of what you dont use to keep your home residence can be used to keep any other kind of property as a wild card exemption.
In 2022 the federal exemptions have a specific $1,325 wildcard exemption. Kentucky has a much larger wildcard exemption than Indiana. This makes it possible to keep over $14,450 + $1,325 if you dont use the $28,900 real estate exemption to keep a home. Please note that the full amount of the $28,900 exemption is meant to keep your home. However, the remainder of what you dont use for your home is reduced to half if you use it to keep other property.
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Will I Be Allowed To Keep My Tax Refund After Filing For Chapter 7 Bankruptcy Protection
Its that time of year again. People are filing their taxes and, quite possibly, anticipating refund checks. However, if youve recently filed for bankruptcy, or are in the process of filing, you may be wondering whether or not youll get to keep your refund.
Under Chapter 7 protection, your income taxes are considered part of your bankruptcy estate. Your tax return is part of your bankruptcy estate, which means that your Chapter 7 bankruptcy trustee will have control of your tax return. Just like your car, your house and your bank account, your tax return is considered an asset. The refund is an asset which your trustee may use to pay some unsecured debts.
That being said, whether you get to keep your refund money depends on when you filed for bankruptcy. An experienced bankruptcy lawyer can advise you about how timing will play a role in your ability to keep your tax refund.
What Can You Do to Keep Your Money?
Spend the money on necessities : These include utilities, car payment, mortgage, food, medical care, education and clothing. Keep records.
Adjust tax withholdings: If you know early on that you are planning to file for bankruptcy, you can adjust your withholdings to reduce the amount of taxes paid and maximize your weekly income. This will likely produce a negligible refund, which your bankruptcy trustee may just disregard, allowing you to keep the small amount of money. Just make sure you withhold enough so you dont end up owing taxes.
Possible Ways To Keep A Tax Refund In Chapter 13
Determining what to do with your tax refund is mainly discretionary, so your trustee might allow you to keep the tax refund. An unforeseen event or need that has affected your ability to pay living expenses might sway the trustee. For instance, it’s common for a debtor to need car repairs or a new vehicle at some point during the plan.
Even so, in most cases, the trustee will require you to contribute your tax refund as part of your Chapter 13 plan. As a practical matter, one of the only available preventive options in Chapter 13 is to adjust your employment tax withholding to decrease your tax refund. The smaller your refund, the less the trustee can take. But it’s best to do this before filing for Chapter 13. You wouldn’t want it to later appear as an attempt to hide bankruptcy income owed to your creditors.
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How Will Chapter 7 Affect
You’ll lose property that you own that is not exempt from sale by the bankruptcy trustee. You may lose some of your luxury possessions. Most state exemptions allow you enough so that most things you own will be exempt from bankruptcy, sometimes allowing more coverage to keep your property than you need.
What Happens To Your Tax Refund After Filing For Bankruptcy
Youve gotten to the point where youre realizing that bankruptcy is going to be the best way to deal with your overwhelming debt. Yet you know that you have a tax refund coming up, and youd like to be able to use that money to start getting back on your feet after your debts have taken up all your resources for so long. Will you actually be able to keep your tax refund? Or will the bankruptcy court take your refund to satisfy your creditors?
The answer is: It depends. By working with a Tucson bankruptcy attorney, you can understand how the law applies to your specific situation and what you can do to keep more of your tax refund . However, heres a general overview of what bankruptcy law allows:
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Can I Keep My Tax Refunds If I File Chapter 7
Tax season is here again. Understandably, people filing or considering filing Chapter 7 are concerned about losing their tax refunds. The good news is that if done properly, the bankruptcy filing will most likely not cause the loss of a tax refund. Most debtors lose their tax refunds because they fail to properly disclose and exempt the tax refunds, which is common when attempting to file without an attorney or when hiring an inexperienced or careless bankruptcy attorney.
Are You Entitled To A Tax Refund When You File For Chapter 7
The Chapter 7 trustee will want to know whether the IRS owes you a tax refund you haven’t yet received. If you already got your tax refund before filing for bankruptcy and you aren’t owed anything further, your answer will be “No.” But you’ll need to protect all of your cash and money in a bank account with a bankruptcy exemption, or you’ll lose it .
If you’re still waiting on your tax refund, even if you haven’t filed your tax refund yet, your answer will be “Yes.” You’ll have to protect all of the funds you’re owed but haven’t yet received with a bankruptcy exemption, too.
Any refund that results from income earned after filing for bankruptcy is yours to keep. This chart explains when you might have to turn over tax refund funds in Chapter 7.
You keep the full refund.
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What Do You Need To Do To Keep Your Refund After You File A Chapter 7 Or 13 Bankruptcy
You can only keep Chapter 7 income tax refunds if you use an exemption. But, if you transfer property out of your name, you cant use the exemption. For instance, the exemption is not usable if you pay back $750 to your mom for a loan before filing Chapter 7. This is because it is a preferential or fraudulent transfer. You can only exempt property you own and need to start over on. Either way, the trustee sues your mom to recover the money. Instead, by using an exemption in Chapter 7, or an expense using it for an expense in Chapter 13, you might be able to keep the money and repay her after filing. However, by transferring assets, you lose the ability to keep assets.
It is easy to keep a tax refund in Chapter 7 by spending a refund before you file for a Chapter 7 bankruptcy. Then, after you spend the tax refund, it is no longer an asset. In Indiana, the trustee looks at next years tax season refund as an asset if you file bankruptcy after September in Chapter 7. In Indiana, the exemption is minimal, and the trustee will pro-rate any refund check.
Planning For Chapter 7
Here are some ways to increase your chances of keeping your tax refund in Chapter 7 bankruptcy.
If you file during tax season. Individuals who file bankruptcy during tax season often have to figure out what to do with the tax refund they have just received. You can use any available tax refund or wildcard exemption to protect it. But if your state doesn’t offer these exemptions, or you want to save your wildcard for other assets, consider these strategies:
- If possible, file for bankruptcy after receiving and spending your tax refund. If you choose to do this, be sure to use your refund on necessities and not to purchase new assets.
- Use your tax refund to pay your bankruptcy attorney for the fees and costs of your case.
These strategies have been found to pass muster in most bankruptcy cases because you’re allowed to use your assets to pay expected living expenses. Neither option involves an attempt to avoid paying a creditor, which is considered fraudulent in bankruptcy.
Adjust withholdings. If you expect a significant return because of amounts deducted from your paycheck, the fix is to adjust your tax withholding early in the year. Keep in mind that this tip won’t be as helpful if you change your withholding later in the year such as from October through December.
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Do You Have To Produce Copies Of Tax Returns In Bankruptcy
Yes, you have to produce copies of tax returns in bankruptcy. The bankruptcy trustee compares the income that you list on your tax returns to the income that you report in your bankruptcy filing. They verify that your filing is truthful and accurate. For filings under Chapter 11, the debtor must submit both a 1040 individual return and a 1041 bankruptcy estate return.
Your Income Tax Takes Your Income Tax Refund
You might lose a tax refund in Chapter 13 because of the requirement to pay to the trustee funds that exceed your monthly budget. In other words, it is a requirement that all your disposable income is paid into the plan.
In the western district of Kentucky, you must turn in a copy of your yearly income tax return by May 15th. Western Kentucky allows you to keep the income tax deduction in the first year of your plan. Also, a tax refund is an asset you exempt during the first year.
In the later years, a tax refund is a disposable income you must use to repay your creditors. You lose the tax refund in the second through fifth year of the plan. You may keep the earned income credit portion of the refund, but you must surrender the child credit.
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How To Keep Your Tax Refund In Bankruptcy
One way to keep your tax refund after bankruptcy is by making the best use of the exemptions allowed by federal and state governments.
The exemptions are designed to make sure people who file for bankruptcy have what they need to live on housing, a car for work, work equipment, and financial assets like Social Security, pension payments, veterans benefits and retirement savings.
Things that may not be exempt are bank accounts, stock investments, a second car or home, collections, jewelry and other luxury items.
A tax refund is extra cash, so it may not be exempt. It depends on the exemptions in your state. There may be a way to use exemptions to keep your tax refund in bankruptcy.
If youve filed for Chapter 13, its a little trickier and involves setting up your payment plan in the right manner.
Another option is to take action before you file for bankruptcy.
A Different Way To File Taxes
The concept of bankruptcy is that you, as a debtor, surrender your right to handle your own affairs, and a trustee is appointed to oversee them, said Carl G. Archer, a bankruptcy lawyer with Maselli Warren, P.C., in Hamilton, New Jersey. Your affairs become part of an estate, the same way they would be if you were incapacitated or if you had died. The trustee’s sole responsibility is to pay creditors with any assets that aren’t exempt under federal or state law, whichever is applicable.
The confusion for taxpayers in bankruptcy springs from the requirement for the filing of two types of tax forms. One is for the individual and the other is for the bankruptcy estate.
As a Chapter 7 debtor, you would file your usual 1040 the same way you normally would any other time, Archer said. The trustee would not have anything to do with that because it’s not a debt it’s an obligation that you have to file that paperwork with the federal government. The trustee, however, would file a Form 1041 for the bankruptcy estate.
On the other hand, if a debtor files for bankruptcy under Chapter 11, he typically remains in control of the assets and will act as the bankruptcy trustee. The debtor acting as the bankruptcy trustee is required to file both the individual 1040 individual return and the 1041 bankruptcy estate return.
In the case of a Chapter 13 bankruptcy, the debtor pays disposable income into a monthly plan to pay creditors.
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Can I Keep My Tax Refund After Filing Chapter 7
Learn from Andrew Walker how you can afford a bankruptcy lawyer when filing for bankruptcy.
When you file for bankruptcy, you typically have to give up any luxury assets as part of the process. While you can keep your home, car or truck, and retirement accounts, some other things become part of the bankruptcy estate under Chapter 7 filing rules. In Minnesota, people without a lot of equity in a house, and renters, get to keep their tax refunds. People with lots of equity in their houses lose a portion of the tax refund for one year. A good lawyer will work with you to minimize the loss of tax refunds in bankruptcy.