- Tax

Keeping Tax Refunds in a Chapter 7 Bankruptcy


Before the client files for bankruptcy, the question always comes up: Can I keep my tax refunds after I file? The answer is a very simple “maybe.” It depends on whether you are filing a Chapter 7 or a Chapter 13 bankruptcy. Tax refunds can be several thousands of dollars and I, like most people, start to figure out what I am going to do with it before I ever get it.

In a Chapter 7, tax refunds are an asset even if you haven’t received the refund yet. Think of an anticipated refund as a future asset. When you file your Petition and Schedules, you must list all assets and property rights. This includes that future tax refund that you are thinking about using to get your car fixed, take a trip, or catch up on some bills.

Once you list an asset, you have to exempt it. In Michigan, we can use either Federal exemptions or State exemptions. Most people use Federal exemptions so we will too for this post. Since there is no specific exemption for protecting a tax refund we use the “wildcard” exemption to protect it and it usually covers all of the refund. For example, your refund for the prior year was $4,000.00. You then file your case at the end of June. You would schedule $2,000 in anticipated tax refunds then use your wildcard exemption to protect it in full. Not that difficult.

What happens if you fail to list the asset or exempt it in full? That’s a much easier answer. You will lose it. The Trustee will take the refund, or the non-exempt portion, sometimes directly from the IRS, and use it to pay your creditors. The Trustee won’t think twice about it. The Trustee may even keep your case open until tax season to review your tax returns and then seize the refunds. It happens all the time to unwary filers and inexperienced bankruptcy lawyers.

To learn more about bankruptcy, please take some time to visit my website at: Downriver Bankruptcy.