Tax Refund and Bankruptcy

If I File Bankruptcy, Will I Be Allowed to Keep My Tax Refund

The best way to answer this question is to say, "maybe". When you file bankruptcy, the assets within the case are part of the entire bankruptcy estate, and a tax refund is considered an asset in the case.

In a Chapter 7 filing, the money received from a tax refund can ultimately be divided among the debtor's creditors and used to repay some of the portion of those outstanding debts. That money is now an asset and the trustee has the authority to direct how that money will be used. The trustee will study the individual facts of the case and decide accordingly.

In a Chapter 13 filing, where money is being paid each month by the debtor to the trustee, so as to satisfy a portion of the outstanding debt, (called the debtor's "Plan"), a tax refund would be immediately applied to the amount owed. In a case such as this, the debtor would not receive the refund and in most cases, the refund goes directly to the trustee, and not the debtor.

However, a very important fact to remember here is that any portion of the tax refund that comes from the Earned Income Credit is exempt, and therefore, that amount would be given back to the debtor. This fact applies to either Chapter 7 or Chapter 13. Make sure you let your attorney know that a portion of your tax refund is due to the Earned Income Credit. Once he is aware of that fact, he can present it to the trustee, and arrangements should be made for you to keep that portion of your refund.?