What happens to your tax refund if you file for bankruptcy?
Transcript:
Hi. Matt MacArthur, Bankruptcy Attorney, Clear Counsel Law Group. I had somebody in my office the other day who was getting ready to file for Chapter 7 bankruptcy, and they asked a very common question. Am I going to be able to get my tax refund next year or am I going to lose it through filing for bankruptcy? The answer to this question is: it depends. Classic lawyer answer. It actually depends on a number of different things.
To answer the question, first, we need to back up a little bit and think what a Chapter 7 bankruptcy is. Chapter 7 bankruptcy is a liquidation bankruptcy. It involves the process of listing all of a persons assets and determining whether or not those assets are exempt or protected. Or whether they're going to be subject to liquidation or seizure by the bankruptcy court to be distributed to an individual's creditors in exchange for the discharge or the wipe out of the debt.
The question then becomes, so it relates to a tax refund, is a tax refund an asset that can be protected? This is where the depends part comes in. A tax refund is definitely an asset and it needs to be protected in order to be preserved for the individual to be able to keep the funds that come in the refund the following year. Whether or not it's something that can be protected is going to depend on what state the person is filing in and what state's exemptions or protective laws are available for this individual to claim as part of their bankruptcy process. It also depends on what the nature and make up of tax refund is. There are certain kinds of refunds that people will receive that contain something that's called Earned Income Credit. That's a very commonly protected portion of a tax refund. It also depends on the amount of the refund. There's several different factors that determine whether or not a person can keep their refund.
It's impossible for me to give a general answer for everyone whether or not they'll be able to keep their refund or not. Again, it's a very fact intensive analysis that we go through to determine whether or not a person can keep their refund.
If you come in and see me or another experienced bankruptcy attorney, I'll do my best to make sure we go through the facts of your particular case, and let you know, with a very high degree of certainty, what the outcome is going to be in relation to your tax refund for the following year. Until next time
