Tax Refunds and Bankruptcy

It is officially tax refund season! If you normally get a tax refund and have filed or are considering bankruptcy chapter 7, there are a number of issues to be aware of.

 Tax Refunds can be Assets in Chapter 7 Bankruptcy

Your tax refund is money the government owes to you.  In Indiana, we have limited exemptions for protecting “intangible” assets such as cash on hand or money owed to you. So, if you file bankruptcy before receiving your tax refund, you may have to turn over that refund to be used to pay creditors in your bankruptcy. The bankruptcy attorneys at Perez & Perez can help you plan to avoid losing your refund if you are planning to file bankruptcy. If you haven’t filed yet, they might advise you to use the money to pay the bankruptcy filing expenses, as well as other reasonable living expenses, in order to spend down the money before filing your case. But using the money the wrong way (such as to pay back relatives you owe money to) can be devastating to your case. So talk to a bankruptcy attorney before doing anything with the money.

Your Tax Refund may not belong to you

If you filed Chapter 7 bankruptcy in the second half of 2014, there’s a chance the tax refund you are about to receive is not yours at all. It may belong to your bankruptcy estate for paying creditors. If you don’t remember whether you were supposed to turn over your tax returns and refunds, check with your attorney before spending any of the money. It may not be yours to spend, and spending it is stealing…which could have major negative consequences, including being sued and garnished for the money, losing your bankruptcy discharge, and losing to right to ever discharge your debts through bankruptcy.

Tax Refunds can be an issue in Chapter 13 Bankruptcy

If you have already filed Chapter 13, you may have a requirement to turn over your tax returns, and potentially part of your refund, to the Chapter 13 Trustee for use in paying your creditors. Check with your attorney before spending any refunds to be sure. It also never hurts to send your attorney a copy of your returns, even if you are not sure if you need to provide it to the trustee. This is also a good time to review your total income for any major changes. You may be required to report increases to the court, and it is better to report changes in advance than to wait for the trustee to “catch” you.

When in doubt, ask!   Call us at 317-634-5968 today!