During your bankruptcy, your tax return problems may arise. Everyone wants to keep their refund, especially if the amount is quite large. However, the guardian assigned to your case may ask you to submit your refund. Whether you can keep your refund depends on several factors that you should discuss with your attorney. Any income due, but not yet received, (including tax returns) is considered part of your ‘Estate Bankruptcy’. Your refund may become part of your estate if it is deposited in a bank account, unused.
The point you need to recognize is this; depending on a) local customs, b) the designated trustee for your case, c) whether or not refunds can be excluded, and d) whether the refund amount involved is commensurate with the trustee’s efforts, bankruptcy complainants can, and regularly do, must submit part or all of his income tax return.
One factor the trustee will consider is the size of your refund. The trustee may view these funds as money that will be used to meet some or all of your creditors’ claims. If your refund is smaller—perhaps in the $500 range—it may not be worth the time the trustee takes to retrieve the refund, as distributing the funds to each of your creditors will cost more than the refund amount.
Depending on your particular circumstances and whether you wish to file in the future or have filed for Chapter 7, or Chapter 13 bankruptcy, you may not be able to withhold your tax return even if you received it before filing. However, there are always exceptions to the rule.
Some Exceptions
These few exceptions will indicate that all refunds must be part of the bankruptcy estate. In many cases, complainants are allowed to keep a portion of their refund. How much a person can save depends on many factors which include whether any exceptions or exemptions apply and when bankruptcy was filed.
The method of calculating the portion of the return that is entitled to the trustee is as follows: In general, the portion of the tax return belonging to the bankruptcy estate is the portion obtained before the filing date, in proportion to the entire return. . For example, if a person files for bankruptcy on December 30, the bankruptcy estate covers 364/365 of the income tax returns due for that year, and if a person files on February 1, 2013, all refunds that have not been received for the Year 2012 can be considered as part of the bankruptcy estate, as well as 1/12 of the refund for 2013.
If you receive your tax returns before you file for bankruptcy and then spend them wisely (keep the receipts – the trustee might ask for them!) then you’ll be out of trouble.
The Best Way to Save Your Refund
Spending your refund to cover your rent, mortgage, car payments, or bankruptcy attorney fees is probably the safest way to use your tax return.
Another action for the whistleblower is to avoid the problem altogether by correcting only your W-4 withholding for the year so that little or no refund will be due.
Since every case is different, you should not make assumptions about whether or not you can keep a refund. This is true whether you have filed for or plan to file for bankruptcy in the near future. Whether you have filed or plan to file in the future, you should consider the benefits of discussing your case with your attorney beforehand.
