What Should You Do If You Expect a Large Tax Refund, But Haven’t Filed the Bankruptcy Petition Yet?

Craig Dennison Robins

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Bankruptcy Attorney - Woodbury, NY

Contributor Level 14

Posted over 4 years ago. 0 helpful votes

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TIP: This is where pre-bankruptcy planning becomes very important.

If you expect a large refund, you may want to delay the filing of your bankruptcy petition until you receive the refund and spend it down in an appropriate manner.

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How to Spend Your Tax Refund in a Proper Manner Before Filing for Bankruptcy

Using a large tax refund to pay your rent or mortgage, buy food, make a car payment, or even pay your bankruptcy attorney, are all types of payments that are consistent with filing for bankruptcy in good faith. Sometimes the refund can also be used to buy necessary clothing or furniture, fix your house, repair your car, or get necessary dental work done. However, you cannot pay existing debts to friends or relatives, give the money away, gamble it away, or buy luxury goods. In general, using it to pay any reasonable and necessary expenses is O.K. Since pre-bankruptcy planning can be tricky in order to do it in a way that complies with the bankruptcy law, it is always best to seek the advice of a competent bankruptcy attorney before doing so.

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If you need to file your bankruptcy petition before you recieve the refund, you must list it in the petition. Here's How:

To protect your tax refund, you must exempt it by including it as an asset in the Schedule B, which is the Schedule of Personal Property, by stating the anticipated amounts of both the Federal and State refunds, and by listing the exemption and the correct exemption statute in Schedule C to the petition, which is the Schedule of Exemptions. If you have to file your bankruptcy petition before preparing your tax return, then you will not know the amount of your refund (which is fairly common because most people don't do prepare their tax returns until April). In such situations, you should nevertheless list it as "possible income tax refund for the 2009 tax year. . . . Amount $ - unknown -"

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You May Be Able to Keep a Non-Exempt Tax Refund If It Is Small. Here's why:

Generally, trustees will only administer non-exempt assets if it is reasonable to do so. If the tax return is relatively small, it will probably be administratively inconvenient for the trustee to be burdened with all of the work necessary to distribute a very small amount.

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Additional Sources of Information About Protecting Tax Refunds

I recently wrote an extensive series of articles on my bankruptcy blog about TAX REFUNDS and BANKRUPTCY. I also wrote a post about the issues a Chapter 7 trustee considers in deciding whether to take a debtor's money or assets to distribute to creditors: Sometimes Debtors Can Keep Non-Exempt Assets in Chapter 7 Bankruptcy Cases. Links to these articles are below.

Additional Resources

Tax Refunds and Bankruptcy – Everything You Need to Know

Sometimes Debtors Can Keep Non-Exempt Assets in Chapter 7 Bankruptcy Cases

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