Bankruptcy and Your Tax Refund

Many people considering bankruptcy don’t think about their income tax refund. But they should!  When you file under Chapter 7, all non-exempt property owed to you at that time becomes property of the bankruptcy estate.  Although you may not yet know the amount of your income tax refund, it is considered owed to you and, unless it is exempt, becomes property of the bankruptcy estate.  For that reason, if you routinely receive a refund, it is important to consider the following when contemplating filing for Chapter 7 relief.

How Does Bankruptcy Affect My Tax Refund?

  1. Is your Refund Exempt?

    In Oklahoma, if you claim the earned income tax credit, that portion of your refund will be exempt under Oklahoma law.  In other words, you get to keep your refund no matter when you file your bankruptcy.

  2. Timing

    Unless all of your refund is the earned income tax credit, the timing of your bankruptcy will determine what percentage of your refund becomes property of the bankruptcy estate.  Were you to file bankruptcy on February 1, then 1/12 of your refund for the current year becomes property of the bankruptcy estate.  However, if you file on July 1, then 1/2 of your refund for the current year becomes property of the bankruptcy estate.  (Keep in mind that your returns which result in these refunds won’t be filed until the following year.  Regardless, you will owe to the trustee that portion due at the time your bankruptcy was filed).

  3. Current Refund

    It is also important to consider your current refund (from the past year) as well.  If you have not received and spent down your refund (on reasonable and necessary expenses) from the prior year before you file your bankruptcy, it will, aside from any amounts due under the earned income tax credit, become property of your bankruptcy estate.

  4. But I Owe Taxes!

    If you have no outstanding refund due, and know that you will not be receiving one for the current year, then this issue is not a factor in when you should file your bankruptcy. (However, other issues outside of this topic may impact that decision).

  5. When to File?

    As reflected above, if you are expecting a non-exempt tax refund, the best time to file, all other things being equal, is as early in the year as you can after you have received and spent the past years tax refund on reasonable and necessary expenses.  (Examples of these include normal living expenses.   You should keep receipts of these payments.  You should likewise be aware that if you have sufficient income to have paid them without your tax refund, the trustee may question your actions.   Finally, you should not repay large amounts of unsecured debt to a only a few of your creditors, especially loans to friends or family members , as this will likely result in the trustee attempting to obtain those payments from them).

If you are contemplating bankruptcy and routinely receive a tax refund, now may be your best time to start the process.  We are here to help!  Please contact our Oklahoma Bankruptcy Attorney and let us help you.

(We are a debt relief agency and we help people file for bankruptcy relief under the Bankruptcy Code.)