What Happens to My Tax Refund If I File For Bankruptcy?

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When you file for bankruptcy, you expect that most of your assets are going to go toward your creditors. What about a tax refund though? Technically, you received that after you filed for bankruptcy, so shouldn’t you get to keep it? In most cases, the answer is no. A Bergen County bankruptcy lawyer from our firm can explain why.

When is a Tax Refund Part of Your Bankruptcy Estate?

What is most important is when a tax return is considered part of your bankruptcy estate. This is the sum of your assets and liabilities when you file for bankruptcy.

In Chapter 7, everything is liquidated and you get rid of anything that you do not carve out an exemption for in an effort to pay off creditors to their satisfaction. A tax refund is often going to go right to those creditors.

If you filed for bankruptcy in 2021 and got a tax refund from your 2021 return, the logic is that you already had that refund as an asset when you filed for bankruptcy. The IRS was essentially holding it for you like it was in a bank account. However, file taxes for 2022 and get a refund and that will not be part of your bankruptcy estate.

When you file for Chapter 13 bankruptcy you enter into a multi-year payment plan. Any tax refund received in that time is going to be considered part of your estate.

What About a Tax Refund From an Older Return?

Sometimes we fall behind on our important paperwork, like tax returns. If you file taxes late while you are going through the bankruptcy process, it’s important that you know that any tax refund received is also likely to be considered part of the bankruptcy estate.

As an example, let’s say you filed for either Chapter 7 or Chapter 13 bankruptcy in 2022. Then you realize that you did not do tax returns for 2017, 2018, or 2019. All of these returns give you a refund and you can expect that refund to go right to your creditors.

Can Bankruptcy Exemptions Protect My Refund?

Sometimes an exemption can be used to protect your refund. The federal government offers a “wildcard” exemption that can be used to protect an asset like a tax refund. The exemption is $1,475 and you can also use whatever remains of your homestead exemption up to $13,950, so this can actually be quite significant.

If you have filed for Chapter 13 bankruptcy, your tax refund will often go right to creditors to pay them off faster. In some cases there can be an arrangement that only part of your tax refunds are taken during the years you pay off creditors. You can also ask to keep your refund if you can show that you need it to pay for expenses.

Schedule Your Consultation Today

If you have any questions about the bankruptcy process, consult our legal team. Contact the Law Office of Boyd & Squitieri and schedule a meeting. We can take a closer look at your situation and advise you on the best path forward.