Do Tax Refunds Count as Assets in Bankruptcy?

Depending on the bankruptcy chapter you file under, your assets may be liquidated to repay creditors. Lots of things count as assets that might surprise debtors, such as tax refunds, which they may not be able to keep or ever receive during a bankruptcy case.

Tax refunds are assets during bankruptcy, which means you must report them when listing your assets and filing your case. If you file Chapter 7 bankruptcy, you may be able to use a wildcard exemption to protect some or all of your tax refund from being taken to repay creditors. Any tax refunds you receive while completing a 3 to 5-year Chapter 13 bankruptcy repayment plan are considered disposable income and taken by the bankruptcy trustee to pay off debts.

You can call Young, Marr, Mallis & Associates at 215-639-5297 to get a free case analysis from our bankruptcy lawyers.

Do Tax Refunds Count as Assets in Bankruptcy?

Tax refunds count as assets during bankruptcy. How those assets are treated during bankruptcy mostly depends on the type of bankruptcy you file, either Chapter 7 or Chapter 13.

Tax Refunds and Chapter 7 Bankruptcy

If you file for Chapter 7 bankruptcy before receiving your tax refund for the year, the bankruptcy trustee might seize the funds to repay your credits, potentially leaving you with no funds from the refund. If you file for Chapter 7 bankruptcy after receiving the refund and depositing it into your bank account, the bankruptcy trustee can also access the money and use it to repay creditors, unless you can exempt the refund from the bankruptcy estate or you have already spent it.

Tax Refunds and Chapter 13 Bankruptcy

Any tax refunds you receive while completing a 3 to 5-year repayment plan during a Chapter 13 case are treated as disposable income and used to repay creditors. Refunds must be given to the bankruptcy trustee rather than deposited in your bank account to become an asset that is shielded from liquidation by Chapter 13 bankruptcy. You may not be able to keep any portion of your tax refunds while you are completing a repayment plan during a Chapter 13 case.

How Can You Protect Your Tax Refund During Bankruptcy?

Although bankruptcy puts your tax refund at risk, there are a few things you can do to protect your refund from a bankruptcy case.

Wildcard Exemption

You may be able to protect a recent tax refund during bankruptcy by using a wildcard exemption. The federal wildcard exemption lets debtors protect up to $1,675 in assets of their choosing, including a tax refund, from being used to repay creditors during a case. You can put the wildcard exemption toward your tax refund or any other assets or property. Many states also have wildcard exemptions, but debtors may not use federal and state exemptions.

Financial Hardship Exception

You might be able to protect the tax refunds you receive while still completing a Chapter 13 repayment plan by requesting an exception for financial hardship or an emergency. Our bankruptcy lawyers can petition to modify the repayment plan so you can keep some of your tax refund.

Adjusting Withholdings

By adjusting withholdings before filing for bankruptcy, your annual return might be lower or nonexistent, eliminating any need to hand over refunds to the bankruptcy trustee during the case. Adjusting withholdings affects your take-home pay, which might help alleviate some financial strain in and of itself.

Strategic Filing

Being strategic about filing for bankruptcy can help you protect your recent tax refund from a bankruptcy case. Put the refund toward daily living expenses before you file your case so that the bankruptcy trustee cannot use any of the refund to repay creditors.

Refunds for years that have already ended are considered part of your estate, even if you have not officially received the refund by the time you file for bankruptcy. You still need to report it, even though the bankruptcy trustee will most likely use it to repay creditors.

Refunds are prorated based on when you file for bankruptcy, so strategic filing could limit the bankruptcy trustee’s access to your refund for that year during a Chapter 7 case.

Top Bankruptcy FAQs About Tax Refunds Answered

Why Do Tax Refunds Count as Assets in Bankruptcy?

Since tax refunds are money, and money is an asset, your tax refund is considered an asset and could be fair game during your bankruptcy case, depending on the circumstances.

Can a Bankruptcy Trustee Take Your Entire Tax Refund?

A bankruptcy trustee may be able to take your entire tax refund for a recent year and other assets to repay creditors during a Chapter 7 case. If you file mid-year, your refund will be prorated, and a portion of the anticipated refund will be set aside for the trustee. They could also take all tax refunds during a Chapter 13 case, as tax refunds are treated as disposable income.

Should You Spend Your Tax Refund Before Filing for Bankruptcy?

Spending your tax refund before filing for bankruptcy means it is no longer an asset you own that the bankruptcy trustee can use to repay your creditors and is not part of your bankruptcy case.

Can the IRS Keep Your Tax Refund During Bankruptcy?

If you owe income tax to the IRS and are filing for bankruptcy, the IRS could keep your tax refund.

Can a Lawyer Help You Keep Some of Your Tax Refund During Bankruptcy?

You may be able to keep some of your tax refund while under bankruptcy by using the right property exemptions and requesting an exception for financial hardship because of a medical emergency or other unavoidable and major expense.

We Can Help with Your Bankruptcy Case

Call Young, Marr, Mallis & Associates today at 215-639-5297 for help with your case from our Pennsylvania, PA bankruptcy lawyers.