There are two concerns regarding tax refunds in bankruptcy. Depending upon whether you are in a Chapter 7 or a Chapter 13, those concerns are slightly different.

Chapter 7

Tax Refund Already Received—A tax refund you have already received prior to filing, but have not yet spent, is part of the bankruptcy estate and treated like cash. You may be able to use exemptions to protect the money.

Tax Refund Expected—A tax refund expected but not yet received is also part of the bankruptcy estate to the extent it relates to income earned prior to the date you filed your Chapter 7 bankruptcy. As a worst case scenario you will be required to turn over the return to the trustee. However, your bankruptcy attorney can also use exemptions to protect the expected tax refunds in bankruptcy, the same way you can protect money that is in a savings account. The important thing is to disclose the expected return and exempt it in the bankruptcy filing.

Tax Refund For Years After The Filing—A tax refund received for income earned during a tax year after the year you filed bankruptcy (and all future returns) are yours to keep. They are not part of the bankruptcy estate.

Chapter 13

Tax Refund Already Received—A tax refund you have already received will be treated as an asset. While the trustee may not take the tax refunds in bankruptcy, any assets you own play a role in determining the amount you will ultimately pay to creditors in the Chapter 13. The refund, if it can not be exempted, may bump up your Chapter 13 payment.

Tax Refund Expected—The safe assumption regarding tax refunds in an ongoing Chapter 13 is that they will become property of the trustee. While you may use exemptions to protect an expected return, the typical Chapter 13 plan is 36 to 60 months.

Tax Refund For Years After The Filing—The same answer as directly above applies here.

What Can I Do To Plan Around This?

In a Chapter 7, you can spend your tax refund or make sure to put your attorney on notice that you expect to receive a return and be sure to exempt it or postpone filing until the asset has been spent on allowable items.

In a Chapter 13, tax refunds in bankruptcy represent an ongoing issue and the easiest way to manage it is to reduce your withholdings so that you’re receiving more in your paycheck on an ongoing basis rather than ‘storing’ up money with the IRS which will result in a large return.

If you do receive a refund in a Chapter 13, disclose the return each year to the trustee. Each trustee’s policies (in different districts) differ. If you can show that you need some or all of the return for necessary expenses like home repairs or vehicle repairs, you may be able to keep some or all of the return. Your bankruptcy attorney should assist you in making this disclosure to the court, together with the argument that you have a need to use the return vs. it going to the trustee.

Get Answers

Call a Charlotte bankruptcy attorney today and get your questions answered. You can begin planning today for a successful bankruptcy in the future. 704.749.7747. The call is free and I’m here to help.

Exemptions in bankruptcy are used to protect property that the client owns or recently sold or transferred. Planning to use exemptions in bankruptcy may dictate waiting a little bit to file, depending upon the value of the asset or the type of transfer that was made.

Exemption planning is perfectly legal and is akin to tax planning—arranging your financial life to take advantage of the laws available to protect your property.

Homestead Exemption

The homestead exemption gives you up to $35,000 in exempt equity (Fair Market Value minus Mortgages). If the client acquired the property within 1215 days of filing for bankruptcy, the bankruptcy attorney may recommend waiting out the remainder of that period.

Spending Excess Cash

For the few bankruptcy clients who have cash in excess of what is allowed in bankruptcy, your bankruptcy attorney may recommend spending down some of the cash prior to filing. So long as the cash is spent on non-luxury items, this is perfectly fine and converts cash to usable items like food, household goods, clothing, etc. Cash that has been converted to household goods can use the household goods exemption in the bankruptcy filing.

Recent Transfers

Transfers made within the last two years to non-family members and non-friends, are subject to review by the bankruptcy trustee. The same is true of transfers to family members and friends (Commonly known as “insiders”) and requires a four year wait period to be outside the reach of the trustee. Exemptions in bankruptcy can be used to exempt these transfers but waiting out the period may be the client’s best bet.

Recent Credit Card Use

If you’ve used your credit cards within 90 days of filing to purchase goods of $550 or more with one creditor, under 523(a)(2)(C), there is a presumption that the purchase was fraudulent—in other words, you knew you were going to file bankruptcy when you made the purchase. The same is true of cash advances in excess of $825 if made within 70 days of filing.

These presumptions are rebuttable, meaning the attorney can argue that the specific facts dictate that the debt should be discharged, but waiting a few more weeks to file is usually a much safer bet.

Tax Refunds

If you expect a tax refund, that money is already part of your bankruptcy estate. It’s an asset that you have to protect. However, if you wait to file until you’ve received the refund and spent it on non-luxury items, you can file bankruptcy without worrying whether the court will try to take your refund.

Call An Attorney

If you have any questions about exemptions in bankruptcy, the timing of filing, or anything else related to debt and bankruptcy, please call me at 704.749.7747. I’m here to help and the call is free.

While a withdrawal from a pension plan or IRA may be taxable income, they typically do not cause a problem in filing a bankruptcy. Regarding whether continued withdrawals should be included in income in a Chapter 13, clients can argue that the remaining retirement funds are needed for retirement.

Disclosure Is Key

The balance of an IRA or pension plan should be treated as an asset and disclosed as such in the bankruptcy petition. The federal bankruptcy rules provide an exemption for IRA funds and pension funds however, so those funds are a protected asset outside of abnormal activity.

IRA Disbursements In A Chapter 7

When you change the character of IRA funds or pension funds by making a withdrawal from the fund and placing the funds into your personal checking or savings account, those funds enter the bankruptcy estate. Like all other funds that enter the bankruptcy estate, you and your attorney will work to protect them by either using the wild card exemption, showing the funds were used for normal living expenses, or exempting the asset you purchased with the funds (Household furniture, etc).

You Deserve To Protect Your Retirement

The fact that the bankruptcy rules allow for exempting retirement funds goes toward a showing that the goal of bankruptcy is not to take everything the client owns, in exchange for forgiving their debt. Instead, the goal is to position the client in such a way that after the bankruptcy they have a reasonable chance at financial success.

Call A Bankruptcy Attorney

If you have any questions, please call me at 704.749.7747 I’m happy to answer questions and the call is free.