Tax Refunds In Bankruptcy

Even though tax season has been over for quite some time, we are already in the fourth quarter for this year. That means that soon we will begin preparing our tax returns for the year 2012, which could be good or bad news depending on your financial situation. Although many people anticipate and receive a refund on their taxes, it may not always be yours to keep.

Property Of The Estate

When you file for bankruptcy, your income, assets and fund accounts become property of the estate. Generally, items in the estate are used to satisfy debts to creditors. There are bankruptcy exemptions that protect some of these items from being eligible for liquidation. Your house, car, some of your personal property, and retirement or benefit funds are typically safe. However, your tax refund may not be protected.

In a Chapter 7 case, your tax refund is considered part of the estate and is not exempt from liquidation. Therefore, any amount you receive in the way of a tax refund is likely to be used for satisfying debts to creditors. In a Chapter 13 case, it is not take for purposes of liquidation, rather it is used to recalculate your income level; which may then increase the amount you are required to pay each month in your wage earners plan.

However, not all hope is lost. If the refund is minimal, it may be disregarded by the court. Also, some states carry additional bankruptcy exemptions that could claim the refund for protection. Generally, these are called “wild card” exemptions, and they could allow you to claim the tax refund cash as an exempt asset in either type of bankruptcy.