How to Keep Your Tax Refund and File for Ch. 7 Bankruptcy.
Once you file for bankruptcy, any anticipated tax refund is part of your bankruptcy estate. Your refund is one of the assets that the trustee in your bankruptcy will be able to collect. A trustee is appointed to represent your creditors once you file a Ch. 7 bankruptcy. Usually around tax season, starting as early as October or November of the tax year, a trustee considers your tax refund, especially if you have received a large tax refund in the prior year. Certain portions of your tax refund are exempt under Ohio exemption laws, specifically the earned income tax credit and additional child tax credit portion of your tax refund, however, the remainder of your tax refund is not exempt. You can apply your cash exemption and/or miscellaneous exemption on your tax refund but sometimes the exemptions are not sufficient to protect the non-exempt portion of your tax refund.
The best way to avoid this problem is to eliminate the possibility of a large tax refund. The first thing we ask our client to do is look at their W-4 to adjust their exemptions so that sufficient taxes are withheld to avoid owing any taxes when you file your return, but also minimizing your refund. This is a sound policy, as you do not want the IRS to sit on your taxes for a year, just to give it back to you around the tax season with 0% interest.
If you do have a large tax refund, you can avoid paying your tax refund to your bankruptcy trustee by waiting to file your bankruptcy until after you file your tax return, obtaining your tax refund, and spending your refund before filing your bankruptcy. You should keep records of how you spend your tax refund. Generally, spending your tax refund on necessities, such as food, car repairs, clothing, house repairs, as well as living expenses, such as car payments, rental payments, utilities, mortgage payments, insurance and related monthly expenses are allowed. What is not allowed is to spend your tax refund by paying back a loan to a friend or family member, or paying down on a credit card or other unsecured debts, as the trustee will be able to recover such expenditure after you file your bankruptcy.
If you cannot wait to file your bankruptcy due to garnishment or foreclosure, then you should know that you might lose a portion or all of your tax refund, depending on the timing of your filing, the amount of your refund and the applicable exemptions.
Tax considerations apply in a Ch. 13 bankruptcy, although there are some different considerations to take into account when filing a Ch. 13 bankruptcy.
Careful bankruptcy planning is recommended before filing bankruptcy. Contact Mina Nami Khorrami, LLC to discuss your case.
The within statements are general in nature and this information is not intended as a substitute for legal advice regarding your specific case, nor is an attorney-client relationship established between Mina Nami Khorrami, LLC and any person reading this information. Mina Nami Khorrami is an experienced bankruptcy and debt attorney based in Columbus, Ohio.