Whether or not you can keep your tax refund if you file bankruptcy depends on the type of bankruptcy you file and the amount of your exempt assets.
For chapter 13 cases, you are required to pay your unsecured creditors the amount of your disposable income for the three to five year period that you remain in a chapter case. In most cases, the bankruptcy trustee will require you to surrender your tax refunds for that three to five year period, as well. If your assets are minimal, the trustee might not ask for your refunds.
For chapter 7 cases, the trustee will consider your tax refund to be property of the estate and, therefore, will ask you to submit your refund in the year you file bankruptcy or the year following the year you file.
For example, let’s say I file chapter 7 bankruptcy on October 1, 2012. I get a $4,000 refund in February 2013 when I file my tax return for tax year 2012. The trustee’s position is that October 1 is the 273rd day of the year in 2012. Therefore, 273/365 of the $4,000 refund was earned in 2012 before you file bankruptcy and is property of the estate. The trustee could then ask you to pay back $2,991.78 (273/365 X $4,000) to repay your creditors.
As a practical matter, if you file bankruptcy in May and you already spent your refund on living expenses, the trustee will probably not want to hold your case open for a year to see if you get a refund the next year. For most cases filed at the end of the year, the trustee will ask you to submit a copy of your tax return the following year to see whether or not he or she will claim an interest in the refund. Keep in mind that the trustees that I am referring to are chapter 7 and 13 trustees in the Fort Myers division of the Middle District of Florida, which handles bankruptcy cases filed in Fort Myers, Cape Coral, Naples, Lehigh Acres, and surrounding areas. Trustees in other districts might follow other rules of thumb.
Here are a few tips to minimize the amount of the refund you will lose:
1. Ask your employer to withhold as little money as possible as is required by law. Your refund will be less for that year.
2. Claim any or all of your refund exempt in your bankruptcy schedules. For example, if you do not own a home and are married, you are allowed to keep $8,000 of any personal property. You can claim the $4,000 refund in the example above as exempt property.
3. If you have unforseen circumstances such as a major home repair or medical treatment and you are in a chapter 13 case, ask your bankruptcy attorney to file a motion in the court for you to keep all or part of your tax refund.
If you are looking for a bankruptcy lawyer in Cape Coral, Fort Myers, Naples, or Lehigh Acres, call the Rothrock Law Firm at 239-206-1948.