How Will Bankruptcy Affect My Tax Refund?
Filing for bankruptcy is a complex process — you have to think about every aspect of your finances and how it could be affected by filing. Many people wonder how their tax refunds will be affected by filing for bankruptcy. It all depends on when the tax return is issued.
Typically a tax refund will be considered an asset during a Chapter 7 bankruptcy filing if you are entitled to receive the refund as of the date of filing. This is money that can be used to pay back creditors, so a bankruptcy trustee is likely going to take it into consideration. If the tax refund has already been received before your filing for bankruptcy, as long as you can show how the refund was spent, you will be fine. this requires keeping good records, including receipts showing how the refund was spent. It is possible that a chapter 7 trustee can require proof of how the refund was spent if the refund was received shortly before the case was filed, or, if a sizeable refund, if you do not have proof how the funds were spent.
It is also possible that the bankruptcy trustee will make a claim for a tax refund cor the year you file. For example, If you file a chapter 7 bankruptcy on June 1, 2016 and expect to receive a tax refund of $6,000 when you file your 2016 taxes the following year, you will lose $3,000 of that future tax refund because as of the date of filing your bankruptcy, you have a right to receive 1/2 of the tax refund you will receive in 2017. Remember, any right you have in receiving income as of the date of filing, can be taken by the bankruptcy unless the property is exempt.
If you are considering filing for bankruptcy and are expecting a tax return that is sizeable, you may want to discuss the issue with your bankruptcy lawyer in Surprise, AZ. There are various things you can do to plan ahead, from adjusting withholdings to spending the refund on debts and expenses prior to filing. Using the tax refund appropriately is key. Your bankruptcy lawyer in Surprise, AZ can advise what would be the best course of action for you.
It’s important to select a lawyer with experience in dealing with the IRS and taxes during bankruptcy, especially if you are dealing with an IRS tax levy or expecting a tax refund. An IRS tax levy can be quite scary and serious, so choosing a qualified, skilled lawyer can greatly assist in calming your fears and getting you to a better place, financially.
This blog is intended as a general discussion of legal issues and not as a statement of fact, legal advice or a legal opinion. No attorney-client relationship is created by this blog. Do not act or rely upon law-related information in this communication without seeking the advice of an attorney licensed to practice in the relevant area.