Tax season can be stressful enough, but it can get even more complicated when you’re in the middle of a bankruptcy case. One common question bankruptcy clients have is: Will I get to keep my tax refund?
The answer depends on several factors, including the timing of your case, the type of bankruptcy you’re filing, and what exemptions you have available.
Timing Matters More Than You Think
Filing your bankruptcy case can directly impact how much of your tax refund, if any, the trustee may be entitled to. For example, if your case is filed in the second half of the year, the trustee may keep it open into the following tax season to claim part of your refund. Why? The refund technically becomes part of your bankruptcy estate unless exemptions protect it.
But there’s a catch: the trustee can’t take everything. For instance, Earned Income Credit (EIC) is protected and off-limits to the trustee. What’s potentially at stake is the rest of your refund, and how much the trustee can claim is based on a proportion tied to your filing date. Filing halfway through the year might expose 50% of your refund to the trustee, minus any protected credits like EIC.
Strategizing With Exemptions
Fortunately, if used wisely, exemptions can protect some or even all of your refund. If exemptions are still available when you file, it’s possible to shield next year’s tax refund in full. This is why attorneys may recommend professionally appraising certain assets, like your vehicle. A lower valuation on your property could free up more exemption room, allowing greater protection for your refund.
Chapter 13: A Different Set of Rules
If you’re in a Chapter 13 bankruptcy, the situation changes. You’re generally required to submit a copy of your tax return to the trustee every year—and yes, you’ll usually have to turn over your refund, too. However, there is some flexibility. If you need your refund for necessary expenses like emergency car repairs, medical bills, or home maintenance, you can request permission to keep it.
This isn’t a free pass, however. You’ll need to provide receipts or other documentation showing how the money will be used. With strong justification, trustees are often willing to approve these requests.
Key Takeaways
- Timing your bankruptcy can significantly impact whether the trustee will go after your tax refund.
- Earned Income Credit is protected and can’t be taken by the trustee.
- Using exemptions strategically may protect your refund—consulting with a bankruptcy attorney can help you plan this.
- Chapter 13 filers must usually turn over refunds, but can ask to keep them with proof of need.
Bankruptcy is all about making the most of the protections that are available to you. A little planning and the right legal advice can go a long way regarding your tax refund.
📞 Call me today at (813) 222-8210 for a free consultation. Let’s find out if Chapter 7 bankruptcy is your path to financial relief.
The information provided on this page is for informational purposes only and does not constitute legal advice or create an attorney-client relationship. Please contact a licensed bankruptcy attorney to determine your bankruptcy eligibility options.