With tax season right around the corner, consumers planning an imminent bankruptcy filing will be eager to learn if they will be able to keep their refund after they submit their income tax return. In both Chapter 7 and Chapter 13 bankruptcy filings, whether or not a consumer can keep a refund depends on the situation.
Chapter 7 bankruptcies
In most cases, those who file for Chapter 7 bankruptcies will be able to keep their tax refunds. However, careful planning is necessary to arrange your tax filing so that you can keep your return. Your situation may vary depending on whether you file for bankruptcy during the tax season or later in the year.
- Filing during the tax season- If you file during or immediately following the tax season, it's best to do so after you have received and spent your refund. A tax refund can be considered an asset in a bankruptcy filing, but states often have certain exemption rules that can help protect refunds. In any case, if you have already spent the refund on necessities, the money won't be taken back.
- Filing later in the year- It's more difficult to protect your refund if you have previously filed for bankruptcy in the last quarter of the previous year. If you are expecting a large refund, you may lose a large portion of it to your bankruptcy trustee. Ideally, you will have requested a smaller withholding in the year preceding a bankruptcy filing so that less tax money is taken out of your paychecks.
Chapter 13 bankruptcies
Unfortunately, those who file for Chapter 13 bankruptcy will usually have trouble keeping their tax refunds. Tax refunds sent out to those who have filed for Chapter 13 bankruptcy will be scrutinized by an individual's bankruptcy trustee. The following are two possible methods of saving tax refund money from a Chapter 13 bankruptcy filing:
- Demonstrate a need for the return for living expenses- In some cases, it may be possible to convince a bankruptcy trustee that tax refunds are needed for living expenses. This is especially the case if you can call the trustee's attention to unforeseen circumstances that are posing financial challenges.
- Lower your withholding beforehand- Many consumers reduce their withholding by declaring more exemptions on their W-4 to deal with the financial challenges that precede a bankruptcy filing. As in the case of a Chapter 7 bankruptcy filing, you can decrease your chances of losing a refund in a Chapter 13 filing by decreasing withholding beforehand.
Talk with a bankruptcy attorney to learn more about how filing for bankruptcy will affect your tax refund.
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