Tax Returns and Bankruptcy

It’s that time of year again. My office receives numerous emails and phone calls each week specifically asking about tax returns and bankruptcy. Mainly, clients want to know whether they can file bankruptcy prior to getting a tax refund, and whether they will lose their tax refund if they file bankruptcy.

Filing Bankruptcy Before You File Your Return

If you file bankruptcy prior to filing your return, you must estimate your tax refund and use bankruptcy exemptions to protect it. Ideally, you can consult with an accountant to get an estimated return amount and use those figures on the bankruptcy filing. The trustee will ultimately want to see your filed return. If the refund does not exceed your allowable exemptions, you can keep the refund.

Filing Bankruptcy After You File Your Return

When you file bankruptcy after you file your tax returns, you’re no longer estimating potential refunds. Your bankruptcy attorney simply discloses the refund amount and uses bankruptcy exemptions to protect it.

If you are filing bankruptcy after filing your return, AND after the refund has hit your personal account, not much changes. You’ll want to make sure with your bankruptcy attorney on the day of filing that any funds in your bank accounts are disclosed and exempted.

If You Owe Money

If you owe money to the IRS or state, that will not prevent you from filing bankruptcy. That tax debt will survive a Chapter 7 filing, but will not interfere with the discharge of other debt. If you’re filing a Chapter 13, the tax debt will be paid over the course of the Chapter 13 plan.

If you have any questions about tax returns and bankruptcy, please call my office at 704.749.7747. I’m here to answer questions.