How Does Bankruptcy Affect Tax Refunds?
Tax refunds are protected in bankruptcy by the bankruptcy exemptions available to all debtors. Your tax refund is an asset, and must be declared as an asset on your bankruptcy case filing. By applying the bankruptcy exemptions to the refund, you can keep the refund.
Bankruptcy Exemptions To Protect Tax Refunds
The Bankruptcy Code provides for debtors to retain property even when filing a bankruptcy. It is for this reason that you can typically keep your home in bankruptcy or keep your car in bankruptcy. The allowances which dictate how much value in an asset is protected in bankruptcy are called Exemptions. Tax refunds are a general asset, and as such, you can protect them by using N.C.G.S. Sec. 1C-1601(a)(2). This is commonly referred to as the “Wild Card” exemption. It allows you to protect up to $5,000 of any asset, including your tax refunds. The exemption applies to each debtor. For a married couple filing bankruptcy, you would have $10,000 available under the Wild Card exemption.
Refunds Received Before Filing Bankruptcy
If you receive your tax refund before you file bankruptcy, you may still need to protect it by using an exemption. It is perfectly fine to spend your tax refund before you file bankruptcy. You may decide to use it to pay for bankruptcy, pay for some home repairs, buy new car tires, or pay for normal living expenses. These expenditures are perfectly allowable in bankruptcy and will not negatively affect your bankruptcy filing. If you have funds remaining from your tax refund when you file bankruptcy, you will use the Wild Card exemption to protect those remaining funds.
Tax Refunds In Chapter 13
If you are filing a Chapter 13 bankruptcy, you will need to disclose your tax refunds each year that you are in the Chapter 13. If your tax refunds are the result of an earned income credit or child tax credit, they are exempt in bankruptcy and you can keep them. Generally, you can also keep the first $1,000 of a tax refund each year. If your tax refund exceeds $1,000, your Charlotte bankruptcy attorney will disclose the refund to the Chapter 13 trustee. This is a good time to also tell the trustee if you have household expenses which you have been putting off. You can propose to keep your tax refund to take care of those household expenses, provided they are not luxurious.
If you are considering filing bankruptcy, it’s important that you speak with a Charlotte bankruptcy attorney. The call is free and you will come away with a much better understanding of your options. You can reach us at 704.749.7747 or click to request a FREE CASE EVALUATION, and we will be in touch shortly.
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