Bankruptcy and Tax Refund

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It’s that time of year again when filing taxes is on everybody’s mind.  While filing tax returns isn’t the most enjoyable pass time, almost everyone likes to get a tax refund.  But, what happens to that tax refund if someone intends to file bankruptcy?

When filing a bankruptcy case, it is the obligation of the Debtor to make sure and disclose all assets; that includes any potential tax refund.  And, just like any other asset, a tax refund is property of the bankruptcy estate.  That does not mean that you will not be able to keep your tax refund in bankruptcy, but it does require the potential for a tax refund be listed as property, and that property is subject to the rules of bankruptcy.

The primary way to protect an asset in a bankruptcy case is with laws called exemptions.  If there is a law that allows a debtor to protect property, it is called exempt.  There are several such laws that apply to tax refunds.  Tax refunds that arise from Earned Income Credit is protected by law, and therefore, exempt.  The additional tax credit may also protect portions of tax refunds, and other more general exemption called the Wild Card exemption and Head of Household exemption may be used to protect tax refunds under certain circumstances.  All of these options should be discussed with a knowledgeable bankruptcy attorney, but it may provide the potential bankruptcy debtor some peach of mind knowing that they might be able to keep their tax refund and still find relief from the bankruptcy court.

So, what can happen to a tax refund varies depending on what exemptions a debtor is entitled to claim.  But proper planning and knowledgeable use of the bankruptcy laws can help keep tax refunds in the hands of the tax payer.

By Addam Fera, W M Law Attorney

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Jeffrey L. Wagoner


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