Bankruptcy and Tax Refunds

For many Americans, the first few months of the year are happy ones because of two words: tax refund. Tax refunds can sometimes be large enough for people to catch up on debts that are troubling them, put down payments on new vehicles, or pay off all of the credit cards they racked up during the holidays. For someone in the middle of a bankruptcy getting a tax refund can be a bit tricky. Legally, a tax refund during bankruptcy can be taken by the bankruptcy court in order to help pay off creditors, but in some cases there are ways around that.

For instance, you can choose to receive your refund 1 of 2 ways: by mail or by direct deposit. If you choose to have it mailed then you should know that it can be intercepted before it gets to you and held until after the bankruptcy court hearing in order to find out what the bankruptcy judge wants to do with it. If you choose to have your refund direct deposited into your bank account you should be aware that if the refund is deposited into a bank to which you owe money your accounts could be frozen until after your bankruptcy hearing. Discuss this decision with your bankruptcy lawyer to ensure the best payment option for you.

Once you have your refund you should document exactly how you spend it in case the court asks. The best way to spend your tax refund while you are in a Chapter 7 or Chapter 13 bankruptcy is on necessary items like rent, utilities, vehicle payments, and mandatory home repairs. By doing this you will show the court that you did not spend the money irresponsibly and they will have no reason to try to get the money back from you. On the other hand, if you spend your refund on items like new TV’s, Ipads, phones, and other superfluous items then the court may have reason to say that you spent the money irresponsibly and could ask you to repay the money that you spent. Again, keep a log of everything you spend your refund on so that you can show the court if they request to see it.

As you can see, tax refunds and personal bankruptcy are tricky so you should notify your attorney immediately when you know the amount of your refund, especially if it is more than $5,000. In most cases your bankruptcy lawyer will do whatever they can to keep your refund safe and in your hands, but you should be aware of the other outcome. You should also know that you cannot give your tax refund to friends and/or family for “safe keeping” until your bankruptcy is over. That is considered fraud and your entire case could be thrown out because of it. The safe bet is to be honest with your attorney about your tax refund so that it can stay with you and not be at risk of being taken by the court.

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