Adam Law Group Blog

How Will Bankruptcy Impact Your Tax Refund?

 

Tax refunds are the end product when people pay more taxes during the year than what they actually owe. While you might not think it, tax refunds are a critical source of income for many Americans. It is common for people to wonder if they will be able to keep a tax refund check after filing for Chapter 7 bankruptcy. While it might not seem like a satisfying answer, the reality is that various factors influence whether or not you will be able to keep this amount. 

How Bankruptcy Courts View Tax Refunds

A “bankruptcy estate” refers to a person’s assets on the date that he or she files for bankruptcy. Provided that these assets are not protected by a bankruptcy exemption, these assets will be distributed to your creditors in repayment of debts. If you earned any of the refund amount for work performed before filing for bankruptcy, this amount will be classified as part of your bankruptcy estate. This can be confusing because while people often do not receive the amount until after bankruptcy filing, refunds are often still included in a person’s estate. Consider the following situations:

  • A person files for Chapter 7 bankruptcy in January 2020. In March, that person files her tax returns for 2019 and receives a $1,873 refund. Because the entirety of the refund was earned before filing for bankruptcy, the entire refund is classified as part of the bankruptcy estate.
  • A person files for bankruptcy in May 2019 and is employed for the entirety of 2019. In February of 2020, the person receives a $3,128 tax refund. The refund amount that the person earned before filing for bankruptcy will be classified as part of that person’s bankruptcy estate, while the amount earned after will not be viewed as part of the bankruptcy estate.
  • A person files late taxes for 2018 in 2020. Any refund from these taxes will be classified as part of the person’s bankruptcy estate because the amount was earned before filing for bankruptcy.

Ways to Protect Tax Refunds From Bankruptcy

Fortunately, it is possible to claim one of several exemptions to protect your tax refund from the bankruptcy process. For one, under Florida bankruptcy law, a person is allowed to discharge up to $4,000 of personal property if that individual does not take advantage of the homestead exemption. The federal bankruptcy exemptions also provide a wildcard exemption in the amount of $1,325 and an additional $12,575 of any unused homestead exemption. If either of these exemptions is available, you can use them to protect your tax refund. Sometimes, however, people rely on the wildcard exemption to protect other types of assets.

Speak With a Knowledgeable Bankruptcy Attorney

Not only is bankruptcy an often nerve-wracking process, but it also results in various questions. Fortunately, a knowledgeable lawyer can help. Contact Adam Law Group today to schedule a free case evaluation.