There are many people that rely on a tax refund to pay for certain bills. Once you file for bankruptcy, your financial affairs are no longer your own, and this includes any state or federal tax refunds. Since the majority of bankruptcy petitions come from low to middle income earners, most will be expecting a tax refund of some description.
One question that is always asked is whether or not a person can keep their tax refund if they have filed for bankruptcy. In some states, you can keep your state income tax refund. When it comes to federal income tax refunds, the news is not so good. These refunds are considered to be a part of your estate and as such are treated as a normal asset.
The news gets even worse for those filing under a Chapter 7 bankruptcy petition. In most states, your tax refund is included in your estate if it is received within the 90 days preceding your petition, or in the 180 days following discharge. In some states, your annual tax refund is considered to be a part of your estate irrespective of when it is received although these state often pro-rate that tax receipt.
For those filing under a Chapter 7 petition, there are several exemptions available, the main one being the wildcard exemption. If you have been relying on your tax refund for a particular purpose, then you can apply your wild exemption to the tax refund.
Under a Chapter 13 petition, the trustee will normally ask you to sign an authorization form that instructs the IRS to hand the tax refund directly to the trustee. There are hardship provisions available that allow you to petition the court to keep all or part of that refund.
There are two easy solutions to handling tax refunds – the first is to hold off on your petition for bankruptcy until you have received your tax refund. Be aware that the court will still examine this windfall to see if you have disposed of it wisely. We suggest you apply it to outstanding debts such as rent, or to important day-to-day expenses such as food. The second solution is even easier – engage a bankruptcy lawyer to handle you petition – they will ensure your bankruptcy petition proceeds smoothly.