Bankruptcy and Tax Refunds

Tax Refunds and Bankruptcy

Soon you’ll have your tax refunds. Many of you have expressed an interest in paying me with your tax refunds once you get them. That’s great. I’m all for it. However, keep in mind who has sued you? Sometimes a remedy that your creditors have is to attach your tax refunds before you even get them. For instance if you owe a tax from a prior year or if you owe a social security overpayment or a student loan on which you have defaulted.

Bankruptcy Estate

In a chapter 7, keep in mind also that a tax refund is part of the bankruptcy estate until you have proven that you have an exemption statute that protects it for you. Things that are exempt are the things that you get to keep. If you cannot protect/exempt it, then you will lose it. Most of the time you probably can protect it and keep it. Anything that you cannot protect or exempt for yourself is part of the bankruptcy estate. The Bankruptcy Trustee’s job is to administer that estate and sell that portion of your property off to pay your creditors. Most of the time, there is nothing for the Bankruptcy Trustee to sell.

If you get it before you file your case and you spend it, then you already got to keep it. However, if you’re going to have any of it left over when you file or if you’re going to receive it after you file, you MUST tell me about it, and it must be listed as an asset in your bankruptcy petition.

Federal Prison

If you don’t tell me about any asset that you own, or have a right to, even if you don’t have possession of it right now, that’s called concealing an asset. Assets also include things you might get, or you might not, such as winning a lawsuit that you’ve filed against your neighbor because his tree busted up your driveway. You might get a few thousand dollars or you might lose and get nothing but a ticked off neighbor.

Fill out the Questionnaire carefully and when you get to the question about tax refunds, don’t just forget about it or pretend it will be forgotten. It won’t. The bankruptcy trustee assigned to your case will remember to ask you if you will get one or if you have recently gotten one.

Penalty of Perjury

You must answer the questions put to you at the hearing under the penalty of perjury and you must be honest. If not, you could be facing up to 5 years in the Federal Prison or up to $500,000 in fines. Usually what happens is they confiscate the object you’ve hidden, or forgotten about accidentally on purpose and then fine you a few thousand and put you away for a couple to a few months. So, there’s no tax refund big enough to make that worth it, and as I said, almost all of the time you can keep it.

Tax Refunds and Chapter 13

You will lose your tax refunds in chapter 13. Maybe you can time the filing of the chapter 13 in order to collect the next one coming but you must in most cases, pledge all of the subsequent tax refunds to your bankruptcy payment plan for the duration of the plan which will be 3 to 5 years. Your Bankruptcy Trustee assigned to your case to use them to pay your creditors.