When tax season rolls around, many households that are struggling financially might be considering filing bankruptcy. Taxpayers often question how their tax refund might be impacted by a pending bankruptcy.
Tax refunds have historically become a predictable source of annual funds for many households. According to the Internal Revenue Service, data from 2019 supports that 73% of tax filers are entitled to a refund.
Knowing how this refund will affect a pending Chapter 7 bankruptcy filing is important when many households rely heavily on that tax refund payment to get through the year.
Tax Refunds are Property of The Bankruptcy Estate
Your bankruptcy estate is made up of all your assets, both things you have and things you are entitled to have at the time your case is filed. Bankruptcy laws called exemptions are used to protect those assets. If your assets are exempt from the bankruptcy estate this means a Trustee will not take the asset to pay your creditors.
Your tax refund is money that is owed to you from a prior year of paid taxes or money that is owed to you as a governmental benefit such as earned income credit or additional child tax credits.
In general, if you earned all or part of a tax refund for taxes withheld prior to your bankruptcy case being filed that portion of the refund is a part of the bankruptcy estate even though you may not have access to it just yet.
Our bankruptcy team will take the steps necessary to properly prorate your refund to keep more of that money in your pocket rather than it being paid to your creditors.
Since the tax refund is clearly an asset, it is important to understand how to protect that asset. The Licata Bankruptcy Firm has the experience and knowledge to properly advise clients how to protect their tax refunds to the fullest extent of the law.
A knowledgeable bankruptcy attorney will understand the limitations of your applicable exemptions and offer proper bankruptcy planning if necessary.
Sometimes the best advice is to spend your refund prior to filing. If this is your intent, it is strongly advised you discuss your plans with your bankruptcy attorney.
Knowing how to spend the money without causing potential issues in an upcoming bankruptcy filing can make a big difference in your bankruptcy outcome.
Our free bankruptcy consultations are an opportunity to fully understand how to address your tax refund when considering filing Chapter 7 bankruptcy in Branson Missouri.