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 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 bankruptcy and eliminate those debts entirely.
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.
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.
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.
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 for bankruptcy at that time.
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 Chapter 13. If your tax refunds are the result of an earned income credit or child tax credit, they are exempt from 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 that 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.
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.
Further Reading
If this article addressing “How Does Bankruptcy Affect Tax Refunds?” was helpful, you may find other helpful articles on our Bankruptcy Blog. Thank you for visiting the website—we hope it has been helpful.