What Happens To My Tax Refund If I File Bankruptcy?

For those struggling with copious debt, an income tax refund can be a huge help. Depending on the circumstances and timing of your bankruptcy, however, this money may be used to pay off creditors instead. In this blog, we explore how tax refunds are impacted by bankruptcy, and how you can strategically use your refund to put yourself in the best possible position.

If you’re struggling with debt, you aren’t alone. Call (321) 320-6088 today to learn how we can help.

Tax Refunds Are Assets

When filing for Chapter 7 bankruptcy after receiving your refund, any unspent portion of your tax refund will be considered the same as cash or other liquid assets. In other words, this money will most likely be used by the bankruptcy trustee to pay off your outstanding debts.

If you start the bankruptcy process midway through the year, or even while filing your income tax return, your refund will likely be prorated. Essentially, you will be able to keep a percentage of your refund based on income you’ve earned after the bankruptcy filing date.

Spending Your Refund

Many people think they should simply spend their refund, thinking that the bankruptcy trustee cannot take this money if you no longer have it. Unfortunately, “luxury” expenses such as jewelry, a new television, or similar may cause your refund to be non-dischargeable.

You can still make big mistakes, even if you think you are using the money responsibly. By paying back your friends and family, for instance, the trustee can find that you have favored them over your other creditors. Likewise, it is not advisable to pay just one or some of your creditors with this money.

So what can you spend your refund on? Depending on your circumstances, there are quite a few approved expenses, including:

  • Mortgage or rent
  • Utility bills
  • Food, clothing, and medical care
  • Car payments and repairs
  • Education

Call (321) 320-6088 To Plan For Your Future

As you can clearly see, the bankruptcy process is about far more than simply signing a few papers, and involves strategic planning before the process even begins. At Buchalter Law Group, our Brevard County bankruptcy attorneys are well experienced in Chapter 7, Chapter 13, and a wide range of other bankruptcy cases. We are also highly knowledgeable in the areas of debt negotiation and loan modifications, and can often help our clients avoid bankruptcy altogether.

Let our experienced team guide you to relief from debt. Contact us for a free case evaluation.

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