It’s that time of year again…tax time.
For many, this is a wonderful time where you will be refunded the taxes you overpaid to the government.
Many view the refund as a savings plan and rely on that yearly return to pay property tax, catch up on bills and/or pay for a family vacation.
While overpaying on your taxes throughout the year is a poor financial decision, I understand the logic.
Unfortunately for some, they will “break even” or owe taxes to the government as a result of under-payment. This is not necessarily a bad thing if planned.
Whatever the case, it is extremely important to consider your 2013 end-of-year accounting if you plan to file bankruptcy.
Attorneys and debtors must be hyper vigilant this time of year with disclosure of information and planning.
The reason is, the income tax refund is property of the bankruptcy estate and is the lowest of low hanging fruit for bankruptcy trustees.
Property of the Estate
11 U.S.C. Sec. 541, states that the commencement of a bankruptcy case creates an estate. Once filed, all of your property becomes property of that estate to be administered for the benefit of creditors.
As “property” is construed broadly, your income tax refund is considered property of the estate.
As such, the bankruptcy trustee may have the right to administer (take from you) that refund for the benefit of your creditors.
Fortunately, most debtors do not lose their refund when they file chapter 7 bankruptcy.
There are essentially two ways to protect your refund from the grasp of the trustee: (1) Exempt it; or (2) Spend it.
Exempting and Planning
First, it should be noted that if you are receiving a nominal refund, the trustee will most likely abandon it as administering it would not truly benefit your creditors.
If you are receiving a sizable amount, you may be entitled to an exemption.
If you do not own a home or have no equity in your home, you would be entitled to a state cash exemption or the federal wildcard exemption to protect your refund.
In most cases, the available exemption is enough to protect the entire refund. In rare instances, the exemption is either not available or not enough to protect the entire refund.
This is where an experienced attorney can help with pre-filing planning.
With the advice and guidance of an attorney, you can spend your tax refund properly prior to filing. It is extremely important that you consult with an experienced bankruptcy attorney before doing this.
No, you can’t purchase that family vacation you have been waiting on but you can pay your attorney, utility bills, mortgage payments, property tax, etc.
By spending your refund properly prior to filing, you have received the benefit of your earned income and protected it from the grasp of certain creditors in bankruptcy.
In some instances, an immediate bankruptcy filing is necessary and there is nothing that can be done to protect the refund, however, in most cases, this is avoidable.
It is your income. You earned it. Filing bankruptcy does not mean it should be confiscated.
Image courtesy of Tax Credits (Flickr).