Now that tax season is upon us, can I lose my income tax refund in a bankruptcy filing?
When someone makes the decision to file for bankruptcy, timing is everything. After the new year begins, many people have shopping regrets from their holiday spending frenzy and decide they need to file for bankruptcy for their New Year’s resolution. This happens almost every year after reality sets in and there just isn’t enough money to make ends meet. What these people don’t think is that tax season is coming up quickly after the new year and those who rely on their tax returns like pennies from heaven usually won’t think about it before filing bankruptcy. So it’s a good idea to cover all the bases and ask the question, can I lose my income tax refund and file bankruptcy?
The simple answer to that question is yes. That is why it is important to have a bankruptcy attorney help the person file their return. A bankruptcy attorney will know when to file to protect your tax refund if necessary. Any income becomes part of the bankruptcy estate when you file bankruptcy. In fact, the trustee will generally look back six months and any money received during this time will be considered income. Worse still, a big fat check from the government that is not protected by bankruptcy exemption laws is fair game for the bankruptcy trustee to use to pay off creditors. When filing Chapter 7, the bankruptcy attorney will look at all cash, savings, and any other assets that can be easily liquidated and will protect those who use the bankruptcy exemption laws. Where there is a problem is when an individual does not think about an income tax refund that is on its way from the federal or state government and the bankruptcy trustee finds it. If the lawyer is not aware of it, it is most likely that he will be left unprotected and swallowed.
That’s why it’s really important to make sure a person has a lawyer they trust and is comfortable sharing intimate financial details. Holding back is not an option. Trying to hide a credit card or some property on the side will only end disastrous in a bankruptcy filing. In this highly technology-driven world, bankruptcy trustees have many tools in their bag of tricks to obtain information about the person filing for bankruptcy. The last thing a person wants to hear at the 341 meeting is that the trustee found some property or income that was not disclosed. The lawyer will have an egg on his face just like the debtor and the digging will begin.
Just because someone is planning to get their tax money back doesn’t mean they shouldn’t file bankruptcy if they absolutely have to. Most states allow generous exemptions to protect a fair amount of property, including a wild card exemption that can be used for anything, including an income tax refund check. As the economy tightens, most people are counting on this annual rebate as some kind of crazy money or for the frugal, just a way to get a little more comfortable for a few months. The amount of these checks in the coming years will likely decrease as the Affordable Care Act takes effect. It will cost each American more money to help pay for health care, leaving less to pay back at the end of the year. The bottom line is, if someone needs to file for bankruptcy, then file. They should speak with a bankruptcy attorney and be completely honest about any possible future windfalls so that the attorney can plan accordingly and even delay filing if necessary.