Now That Tax Season Is Upon Us, Can I Lose My Income Tax Refund in a Bankruptcy Filing?

When someone makes a decision to file bankruptcy, timing is everything. After the new year begins many people have buyer’s remorse from their holiday spending frenzy and decide they need to file bankruptcy for their New Year’s resolution. This happens just about every year after reality sets in and there just isn’t enough money to make ends meet. What these people don’t think about is tax season comes quickly after the new year and those that rely on their tax return as pennies from heaven will usually not think about it before filing bankruptcy. That’s why it’s a good idea to cover all bases and aske the question, can I lose my income tax refund and a bankruptcy filing?

The simple answer to that question is yes. That’s why it’s important to have a bankruptcy attorney help the individual file. A bankruptcy attorney will know when to time filing the petition to protect their income tax refund if necessary. Any income becomes part of the bankruptcy estate when filing for bankruptcy. In fact, the trustee will usually look back six months and monies received during this time will be considered income. Even worse, a big fat check from the government that is unprotected by bankruptcy exemption laws is fair game for the bankruptcy trustee to be used to pay back creditors. When filing Chapter 7, the bankruptcy attorney will look at all the cash, savings and any other assets that could be easily liquidated and protect those using bankruptcy exemption laws. Where there is a problem is when an individual doesn’t think about an income tax refund that’s on its way from the federal or state government and the bankruptcy trustee finds it. If the attorney has no knowledge of it, most likely it will be left unprotected and be gobbled up.

This is why it is really important to make sure that an individual has an attorney that they trust and feel comfortable sharing intimate financial details. Holding back is not an option. Trying to hide a credit card or some property on the side will only end up disastrous in a bankruptcy filing. In this highly technology driven world bankruptcy trustees have a lot of tools in their bag of tricks to get information on the individual that is filing bankruptcy. The last thing an individual wants to hear at the 341 meeting is that the trustee found some property or income that was not disclosed. The attorney will have egg on their face as well as the debtor and the digging will begin.

Just because someone is planning on getting money back on their taxes, doesn’t mean they still shouldn’t file bankruptcy if it’s absolutely necessary. Most states allow for generous exemptions to protect a fair amount of property including a wild-card exemption that can be used for anything, including an income tax refund check. As the economy gets tighter, most people count on this annual refund as a sort of mad money or for the frugal, just a way to be a little more comfortable for a few months. The amount of these checks in the next few years will probably diminish as the Affordable Care Act comes into law. It will cost every American more money to help pay for healthcare leaving less to be returned at the end of the year. The bottom line is, if someone needs to file bankruptcy, then file. They should talk to a bankruptcy attorney and be totally honest about any possible windfalls that might be in their future so the attorney can plan accordingly and even hold off on filing the petition if necessary.