Tax Refunds and Chapter 7 Bankruptcy

If you are thinking about filing a Chapter 7 bankruptcy and also expecting a tax refund, please contact an experienced Dayton bankruptcy attorney! There are many important things to consider. When a person files for Chapter 7 bankruptcy, all of their assets, including their tax refund, become part of the bankruptcy estate. The theory behind Chapter 7 bankruptcy is that the trustee, the attorney appointed to administer the bankruptcy estate, can use a person’s assets (unless exempted or protected as discussed below) to pay off unsecured creditors.

If you file bankruptcy before receiving and spending your tax refund for the year, the unspent refund is considered part of the estate. The tax refund is looked at as money that was unnecessarily paid to the IRS, therefore it is treated like cash or money in a bank account. If you receive a significant refund every year, you may consider adjusting your withholding to reduce the refund to a lesser amount. This will allow you to get more money in each paycheck and make the refund too small to be of value to the trustee.
Planning the timing of your bankruptcy with the receipt of your tax refund is advisable. If you have already received your refund, you are allowed to spend it on necessary expenses prior to filing bankruptcy. Necessary expenses include mortgage payments, rent, home or motor vehicle repair, food, clothing, utilities, medical expenses, etc. However, be careful! Do not use the refund to purchase luxury goods, or to pay a friend or family member, or to pay one particular creditor (this may be a preferential payment – a payment made to one creditor and not others. Preferential payments can be avoided, meaning the trustee can order the creditor to return it to the estate).

Even if you file bankruptcy prior to receiving and/or spending your tax refund for the year, therefore making the tax refund part of the estate as discussed above, you may be able to exempt or protect it. The bankruptcy code (or law), provides exemptions for certain property including some that can protect your refund. For example, the earned income and child tax credits allow many people who file Chapter 7 to keep their entire refund. The wildcard and cash on hand exemptions may also be used to protect some or all of your refund.

If you are expecting a tax refund and also considering bankruptcy, please consult with an experienced Dayton bankruptcy attorney who can analyze your particular situation and help you determine both the best use of your refund and the best time to file bankruptcy.

For more information about bankruptcy, and/or to schedule a consultation please contact your Dayton bankruptcy attorney at Helen Wallace, Attorney at Law today by clicking on the preceding link, by e-mail to or by telephone to (937) 654-6800.

The contents contained in Helen Wallace, Attorney at Law’s Blog and Web Page(s) are for educational and informational purposes only, and shall not be construed as legal or tax advice. The reading of Helen Wallace, Attorney at Law’s Blog or Webpage does not create an attorney/client relationship with Helen Wallace, Attorney at Law. Please consult an Attorney in your jurisdiction (where you live or where the legal action arose) if you are seeking legal advice or representation. Please further be advised that Helen Wallace, Attorney at Law is a debt relief agency and helps people file for bankruptcy relief under the United States Bankruptcy Code.

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