Bankruptcy Facts

It’s tax season again and many of you may be considering bankruptcy.

Things you need to know about how taxes can impact your bankruptcy:

  1. If you receive a tax refund after you file bankruptcy, that refund may become part of the bankruptcy estate.  What that means is that the bankruptcy trustee can use your tax refund to repay creditors, even if you filed a Chapter 7 bankruptcy.
  2. Your tax refund may be able to receive protection by using a bankruptcy exemption, if it is small enough.  This is something you need to discuss with your bankruptcy attorney because he/she may decide that your bankruptcy exemptions are better suited protecting other, more important assets.
  3. If you file your taxes and receive your tax refund before filing bankruptcy your tax refund might not be considered as part of the bankruptcy estate.  This will be determined by how much of a tax refund you received and when you received it.  For example, if you received a $5,000 tax refund a few days before you filed bankruptcy, that money may still be considered part of the bankruptcy estate. Also, if you have unusually large tax refunds, a bankruptcy trustee may decide that you are attempting to hide assets via taxes. On the other hand, if you received a $300 tax refund, six months before you filed bankruptcy and spent the money on bills and other necessities, the tax refund would not be considered part of the bankruptcy estate.  Because this area of the law came sometimes become murky, it is best to discuss your tax refund and bankruptcy with a qualified bankruptcy attorney.
  4. Debtors filing bankruptcy must disclose any tax refund they are planning to receive.  Failure to disclose a tax refund can cause your bankruptcy case to be dismissed.
  5. A bankruptcy trustee has the power to direct the IRS to send your tax refund directly to the bankruptcy court.