Many clients we meet are concerned about their tax refund and if they will lose it when they file a bankruptcy. When asked if they will lose their tax refund, the answer is: It depends. Numerous factors come into play when dealing with a tax refund.
One factor is if the refund has already been received. If the refund has been spent prior to filing, as long as it was spent on reasonable and necessary expenses such as groceries or medical expenses, there should be no issue with those expenditures. However, if the refund was spent on luxury goods such as a trip to an exotic location or a diamond ring, that could present a problem.
If a client has to file their case due to a pending foreclosure sale or repossession of a vehicle and the tax refund has not yet been received, that client might be able to keep the refund depending on the amount of the refund and the applicable state exemptions. In both Kansas and Missouri, any portion of the refund that is attributable to the Earned Income Tax Credit is fully exempt for one year. In Kansas, any portion of the refund not attributable to the EITC would be subject to turnover to the Bankruptcy Estate in a Chapter 7 or would likely have to be paid in to the Trustee as part of a Chapter 13 Plan. In the State of Missouri, any portion of the refund not attributable to the EITC can be protected by the wildcard exemption, which equals $600.00 for a single filer or $1,200.00 if the bankruptcy is filed jointly. In addition, if a Debtor is the head of his or her household, he or she can claim an exemption totaling $1,250.00 as the head of household, plus an additional $350.00 for each dependent under the age of 21. Any amount exceeding those exemptions would have to be paid to the Chapter 7 Trustee upon his or her request or paid in to the Bankruptcy Estate as part of the Chapter 13 Plan.
In a Chapter 13 Bankruptcy, any refund received after the first year of the Plan would be subject to turnover to the Chapter 13 Trustee. An experienced attorney at WM Law could help avoid that turnover by either pro-rating the tax refund as income in the Debtors’ budget or by filing a Motion with the Court requesting the Debtors be allowed to keep the refund for extraordinary expenses not included in the budget, such as major medical bills, extensive automobile repairs, or repairs to the Debtors’ house.
Contact WM Law today to schedule an appointment to meet with an experienced bankruptcy attorney to discuss how filing a bankruptcy would affect your tax refund.