File Chapter 7 Bankruptcy and Keep Your Tax Return
You are considering bankruptcy, but what will the court think about the tax refund you’re about to receive? You need that money to get caught up on bills or to make repairs to your car. Is it possible to keep your tax refund even if you’re filing Chapter 7 bankruptcy?
The answer is: YES.
Even if your refund adds up to thousands of dollars, you are allowed to keep it under the exemptions you are allowed to have. When filing Chapter 7 bankruptcy in Tennessee, each person is allowed to exempt (protect) up to $10,000.00 of personal property. (If you’re filing as a married couple, you get to keep $10,000.00 of personal property.) This would be your furniture, jewelry, cars, household items, as well as cash and your tax refund.
If your tax refund is up to $10,000, you could use your entire $10,000 exemption to keep the entire tax refund. If your tax refund is $2,000, you could keep it all and still have $8,000 left for your furniture, television, etc. You can protect or keep your clothing under another exemption in addition to the $10,000 personal property exemption.
Are there any circumstances that would make me lose my refund?
Your tax refund is your property. However, until you receive the refund, it is in the possession of the United States Treasury. Before they send your refund to you, the IRS checks to see if you owe a federal agency money or if you owe back child support. Many times the IRS will act as the “collection agent” for themselves, other federal agencies, or state child support agencies. The IRS may seize some or all of your tax refund through the federal intercept program. Chapter 13 bankruptcy may be an alternative solution to allow you to keep your tax refund while paying back the federal agency, IRS, or past due child support at a more affordable rate for you.
Read this before spending your tax refund!
When you get your tax refund, you should talk to your attorney about your plans for spending it. You may be tempted to pay back friends or family members who loaned you money during hard times. However, these repayments can have negative consequences on you and your loved ones if you file bankruptcy. The Bankruptcy Trustee could deem these payments as “preferential payments“. The Trustee could sue your family member or friend for a return of those payments. Ouch!
Check out this video from Nashville Bankruptcy Attorney Dan Castagna, explaining how to keep and correctly spend your tax refund so you don’t lose it when you file bankruptcy: