If you are one of the lucky ones who gets good tax refunds, you’ll want to consider how bankruptcy can affect your refund.
The key day in your Chapter 7 Bankruptcy is the day it’s filed. The question is what do you own on that date. Some of your assets may have to be turned over to the court.
AN EXAMPLE
Although you don’t have next year’s tax refund in your hands yet, it might still count as an asset. As an example, let’s say that your case is filed on October 1st of a given year. That year is three-quarters over at that point in time. Assume that later on you get a refund of $4,000. On the day your case was filed, you owned 3/4 of that $4,000 refund or $3,000. If you have no exemptions to apply toward that, you’d have to give up $3,000 of the refund when it comes in.
EXEMPTIONS
You might be able to claim some or all of next year’s refund as protected if you have room under your exemptions limit. This amount varies according to your situation so you’d want to check with your attorney.
Also, in Florida, any part of your future tax refund that is based on Earned Income Credit (EIC) is protected. Assume you get a $4,000 refund but $3,000 of that shows up on the EIC line of your tax return. You get to keep that $3,000.
PROTECTING YOUR REFUND
It’s important to be aware of this refund issue so you can plan. For example, we might delay filing your case until you’ve received your refund first.
IF YOU ALREADY RECEIVED YOUR REFUND
Besides looking at what money you are about to receive, bankruptcy looks at what money you’ve received recently. So let’s use the same example with the $4,000 refund where $3,000 of it was EIC and you got your refund before your case is filed. Note that in this case it doesn’t matter that part of the refund was EIC, you received all of it so the court wants to know what happened to all of it. The new issue that comes up is the question of what you did with the money.
If you still have the refund sitting in your bank account, you’d give it up. Also, it can create very serious problems if you gave it away to relatives or even simply cashed the refund and can’t explain or prove how it was used up.
It is fine if you’ve used it up before your case is filed on things like fees for the bankruptcy, necessary repairs, or medical expenses. Many other uses of the money are fine, but I always stress to check with me first to see if you can use it in the way you want and still protect yourself.
For over 35 years, listening to clients and putting them at ease, while finding solutions and helping achieve future goals, in Marion County, Lake County. Citrus County, Sumter County, and The Villages.
