Can I Protect My Tax Refund in Bankruptcy?

Generally speaking, you may be unable to keep your tax refund for personal spending during your bankruptcy case. This is because it may be grouped in with your nonexempt assets in your Chapter 7 bankruptcy, to which your appointed bankruptcy trustee may claim to repay your creditors. Or, they may be used to meet your monthly payment amount in your Chapter 13 three- to five-year repayment plan. With that being said, please read on to discover if there is any way to protect your tax refund during your bankruptcy case and how a seasoned Louisville, Kentucky consumer bankruptcy lawyer at Schwartz Bankruptcy Law Center can help you manage this return accordingly.

How can I protect my tax refund during my bankruptcy case?

Even though your tax refund is generally considered a nonexempt asset, you may attempt to apply a bankruptcy exemption. Namely, say you choose federal exemptions for your case. Well then, you may claim the wildcard exemption and protect any type of property, including a tax refund of up to $1,475. Plus, any unused portion of your homestead exemption, for up to a total of $13,950.

Or, you may demonstrate to the Kentucky Bankruptcy Court that a portion of your tax refund stems from the Earned Income Tax Credit (EITC). This is a federal refundable tax credit for low- to moderate-income workers. With this, the court may treat this tax refund more favorably, as they may view it similarly to public benefits. Your appointed bankruptcy trustee and the court may still use their discretion, though, to determine whether it is fair for you to keep a portion or all of this refund.

What happens if I spend my tax refund before or during my bankruptcy case?

You must understand that coordinating your bankruptcy filing with when you are expected to receive your tax refund is pivotal. This is because any return you receive during your bankruptcy case may be fair game and used to pay back your outstanding creditors. So while you may spend your tax refund prior to your bankruptcy petition, it is in your best interest to do so in a reasonable manner.

For one, you should only put it towards meeting your basic living expenses, such as rent or mortgage payments, utility bills, groceries, emergency home and auto repairs, emergency medical bills, etc. From here, you must save proper documentation of these purchases (i.e., dated receipts, evidence of need, etc.) and disclose it to your appointed bankruptcy trustee and the Kentucky Bankruptcy Court in your initial bankruptcy paperwork.

A worst-case scenario is if it is discovered that you used this return to pay for luxury items or family loans. This may raise a red flag to your trustee and the court, and they may accuse you of bankruptcy fraud or preferential transfer, respectively. The federal bankruptcy code may allow your trustee to undo certain transfers made before bankruptcy if they are deemed fradulant. But otherwise, you may risk your debt discharge getting canceled, your case getting dismissed entirely, or facing prosecution for criminal activity.

No matter what specific bankruptcy matter you are currently dealing with, a competent Louisville, Kentucky consumer bankruptcy lawyer from Schwartz Bankruptcy Law Center is willing and able to step in and facilitate the process. Retain our legal services today.