When you file for personal bankruptcy you must list all your assets. Many people are surprised to learn that their tax refunds (federal and state) are assets for bankruptcy purposes.
If you’ve already received your tax refunds and want to file for personal bankruptcy you can use your refunds to completely pay for your bankruptcy and/or can spend down that money on your necessary living expenses before your bankruptcy is filed.
If you know you are entitled to receive large tax refunds (e.g., more than $1,000) but have not received them yet, you might need to consider timing the filing of your bankruptcy if none of the exemptions in your state apply or only partially apply to your tax refunds.
If you are using Missouri exemptions, you have exemptions available for the federal Earned Income Tax Credit (EITC) and federal Additional Child Tax Credit (ACTC) and you might be able to use the wildcard exemption and/or head of household exemption to exempt some of the tax refunds which are not attributed to the federal EITC or federal ACTC.
If you are using Kansas exemptions, you have an exemption available for the federal Earned Income Tax Credit (EITC) for one year (see K.S.A. § 60-2315), and an exemption available for the Kansas Earned Income Tax Credit up to 17% of the federal EITC amount (see K.S.A. § 79-32,205(a) providing in part that “[t]here shall be allowed as a credit against the tax liability of a resident individual imposed under the Kansas income tax act an amount equal to [17%] of the amount of the earned income credit allowed against such taxpayer’s federal income tax liability” for that year).
If none of the exemptions are useful under your circumstances, you should consider waiting until you’ve received your tax refunds and have spent those funds down on your bankruptcy fees and/or necessary living expenses.
You should seek the counsel of an experienced bankruptcy attorney to help you navigate the complicated analysis of which exemptions apply in your case when you are entitled to tax refunds.
By Errin Stowell, W M Law Attorney