Bankruptcy lawyers and their clients must be extremely conscious of this as well.
Many people withhold more than the required tax payments from their salary. Typically, this results in an over payment to the government. This over payment is then returned to the taxpayer in the form of a tax refund.
Unfortunately, this tax refund could become property of the bankruptcy estate and be used to pay back creditors.
Whether your tax refund will be lost depends on certain factors that should be discussed with an experienced bankruptcy lawyer.
Property of the Estate
When you file chapter 7 bankruptcy, certain non-exempt assets become part of the bankruptcy estate. This simply means that the property is placed in a pool of assets to be sold to raise money to pay back creditors.
Your tax refund is considered income earned and gets thrown into this pool.
The bankruptcy trustee will have access to the portion of your tax refund earned prior to the date of your bankruptcy filing.
File Bankruptcy and Keep Your Refund
Not everyone who files bankruptcy will lose their refund.
If the refund is minimal, the trustee will not take it as the distribution of the funds to creditors becomes cost prohibitive.
Also, many times the tax refund can be exempted under the state cash exemption or Federal “wild card” exemption.
Even if an exemption is not available, hope is not lost. With proper planning, the tax refund can be spent prior to the case being filed. It is legitimate to spend tax refund money on pre-filing legal fees, mortgage payments, utilities and other day-to-day living necessities.
There are quite a few issues that could impact the proper timing of a bankruptcy filing. Earnings requirements, residency requirements and pending foreclosure proceedings are just a few.
Receipt of tax refunds could also impact the timing of a bankruptcy filing. As we enter the home stretch of 2012 and turnover into 2013, this is an important consideration to keep in mind.
Consult with a bankruptcy lawyer and think long and hard about filing without an attorney.
Image courtesy of Alan Cleaver (Flickr).