If you have decided to file for bankruptcy, you undoubtedly have many questions for your attorney.
A particular tax-related question keeps popping up in your mind: Will the bankruptcy trustee gobble up my tax refund or is there a way for me to keep it?
Understanding what the trustee can do
The bankruptcy trustee assigned to your case can use your income tax refund for the purpose of paying off your creditors. In a Chapter 13 filing, for example, the tax refund can be property within the bankruptcy estate, and the trustee can use it in this way. Furthermore, if you file Chapter 7, your refund may be added to your nonexempt assets, all of which will be used to repay your creditors. In fact, you might never set eyes on your tax refund: Some trustees request that the Internal Revenue Service send it directly to them.
Timing your refund right
How your income tax refund plays into your bankruptcy proceeding also depends on the time of year you file. That will go hand in hand with the year you earned the income that generated the refund.
Taxes are a consideration in any bankruptcy. For example, some tax obligations are dischargeable in a Chapter 7 filing. On the other hand, one of the benefits of a Chapter 13 is that tax debts can become part of the bankruptcy repayment plan, and you can expect to be granted three to five years to pay.
Using exemptions and more
Remember that certain exemptions are possible. By state law in Kentucky, you can exempt anything up to $1,000. You may also be able to use your tax refund to pay your legal fees: This is not so very different from using ordinary resources for this purpose. Keep in mind, however, that different courts have different rules, depending on the jurisdiction.