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If you are planning to file for Chapter 7 bankruptcy, when you file your taxes can make a big difference in whether you get to keep your refund. In general, whether you can keep your tax refund in Chapter 7 bankruptcy depends on:
- the amount of your refund
- your bankruptcy exemptions, and
- when you file your case.
To learn more about how to plan your bankruptcy effectively, see our Prebankruptcy Planning topic area.
Anticipated Tax Refunds Are Property of the Bankruptcy Estate
The moment you file for bankruptcy, almost all of your assets become property of the bankruptcy estate. Property of the estate includes any tax refunds you are owed as of your filing date even if they have not been paid yet. This means that unless your tax refund is exempt, a Chapter 7 bankruptcy trustee can take it and distribute it among your creditors. (For more information, see What Happens to Tax Refunds in Bankruptcy? )
How to Protect Your Tax Refund in Chapter 7 Bankruptcy
If you want to keep an asset in Chapter 7 bankruptcy, you must be able to exempt it. Every state (and the federal system) has a different set of bankruptcy exemptions debtors can use to protect their property. However, exemption amounts and the types of property they protect vary significantly from state to state. As a result, review your state’s exemption laws carefully or talk to a knowledgeable bankruptcy attorney prior to filing your case.
Unless your state has a specific exemption designed to protect tax refunds, you will typically have to use a wildcard exemption to protect your
refund. In most cases, you can exempt any type of property with a wildcard exemption. Unfortunately, not all states offer debtors a wildcard exemption in bankruptcy. In that case, you will need to time your bankruptcy correctly to avoid losing your tax refund.
To learn more about how exemptions help you keep your property in bankruptcy, see our Bankruptcy Exemptions topic.
Time Your Bankruptcy Correctly If You Can’t Exempt Your Refund
If you can’t exempt your tax refund and you are not in a hurry to file your case, the simplest option is to delay your bankruptcy until you receive your refund and spend it. But keep in mind that if you buy another asset with your refund, you will have to exempt that asset as well. In most cases, the best way to spend your tax refund is to use it for your living expenses such as rent, food, gas, or car maintenance prior to filing your case.
What Happens If You Have Unfiled Tax Returns?
In general, whether you are filing for Chapter 7 or Chapter 13 bankruptcy, the bankruptcy trustee will want to make sure that you have filed all required tax returns that have come due. Unfiled tax returns can mean undisclosed tax refunds or missing financial information in bankruptcy.
In Chapter 13 bankruptcy, you must file all required tax returns for the four years prior to your bankruptcy no later than the day before your meeting of creditors (also called the 341 hearing). If you were not required to file a tax return for any reason (such as lack of income), you will need to explain it to the court and the trustee.