If you file for Chapter 7 bankruptcy , you may not need to worry about your tax refund if you take simple steps to plan beforehand. If you are anticipating a refund or you have received it and you plan to file for protection, it is likely you want to know what will happen. It often depends on timing. The good news is there are a few things you can do to keep your refund.
A tax refund is an asset considered part of your bankruptcy estate. Often, what the debtor decides to do with their refund determines how their bankruptcy will proceed. Depending on when you plan to file, you may be able to keep your refund. Some may need to adjust their withholding to reduce their refund amount, use the refund toward necessary expenses, or seek exemptions that protect the refund when filing.
If you think you will file bankruptcy within one year, adjusting the amount of withholdings from paycheck earnings can help reduce your tax refund amount. This helps you get more in your paycheck during the year, yet it should be sufficient to where you are paying taxes based on what you earn. Plus, your refund may be too small for the trustee to consider it for creditors.
If you receive your refund just before filing Chapter 7, use it for necessary needs such as utilities, medical care, car, school, food, mortgage and maintenance concerns such as home or car repairs. If you have concerns on what purchases are allowable consult with your attorney. If you are expecting a refund after filing for bankruptcy, it’s likely you’ll be able to keep it if it is based on funds earned before you filed. The amount exempted may vary depending on the state you live in.
Reference: https://www.nolo.com/legal-encyclopedia/can-i-keep-my-tax-refund-chapter-7-bankruptcy.htm