Chris Layton

Bankruptcy and tax refunds go hand in hand. Each year, individuals find themselves in the unique position of being able to catch up on bills with a tax refund. While this is an admirable way to spend your tax refund, you might consider using the tax refund to file a bankruptcy and eliminate those debts entirely.

Spending Your Tax Refund On Bankruptcy

Spending your tax refund on bankruptcy is a legitimate expense in the eyes of the bankruptcy court. From a filing perspective, if you have additional tax refund money remaining after paying for your bankruptcy, your bankruptcy attorney can typically protect those funds by using the bankruptcy exemptions allowed by law. These include income recently earned, as well as an additional allowance of $5,000 per individual filing.

With this strategy in place, rather than getting caught up on bills temporarily, you work toward a discharge in bankruptcy eliminating the debt from your life entirely. The remaining funds in your account can be used to get off on the right foot after filing.

Filing Prior To Receiving A Refund

The bankruptcy court will ask about an anticipated tax refund and you have to disclose it even if you have not received it. Again, the bankruptcy exemptions can be used to protect the future refund so that your Chapter 7 or Chapter 13 bankruptcy can proceed and you can maintain control over your tax refund.

What If My Refund Is Too Large To Protect

If your tax refund is too large to protect with the bankruptcy exemptions, you can choose to use the refund to pay your normal living expenses for the coming months. Once the money in your account reaches an amount you can protect, you can successfully file bankruptcy at that time.

What Shouldn’t I Do With My Refund

If you plan to file bankruptcy in the near future, you should not spend your tax refund on ‘luxury’ items like a new television or jewelry. Those items will need to be disclosed to the bankruptcy court and because they are new, their value will be high and therefore difficult to protect with exemptions.

An exception to this would be using a tax refund to obtain a new vehicle with financing. Typically, the loan balance on the vehicle will make it an unattractive asset to the bankruptcy court, especially when combined with the available vehicle exemption of $3,500 which protects equity in your car—new or old.

If you would like to speak with a bankruptcy attorney, call me at 704.749.7747. The call is free and the choices you make today can put you in a better position for a successful filing in the future. Or, if you’d like to receive a call, just text “Please call” to 704.258.5897 and we will reach out shortly. It’s that easy.