Tax Refunds Must Be Disclosed on Your Bankruptcy

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Chapter 7 Bankruptcy

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‘Tis the season when bankruptcy trustees are taking tax refunds. Potential tax refunds MUST be disclosed on your petition, just like your couch and car.

Not disclosing your state and federal tax refund is often a sure way to forfeit your tax refund. The problem with tax refunds is usually there is no specific exemption to protect it like your couch or car.

Since many households depend on tax refunds, that leaves two options: (1) Plan to lose or it OR (2) Plan to protect it. The following are some ways my clients have preserved their tax refund:

  1. File bankruptcy at a time of the year when tax refunds are not imminent.
  2. Adjust withholdings after filing bankruptcy to eliminate any refund.
  3. Use an exemption such as the “wildcard” exemption to protect any refund.
  4. Delay filing bankruptcy until after the refund is received and spent.

Of course, protecting your tax refund varies by jurisdiction, making it important to educate yourself or consult an attorney as to local practice. In North Carolina, trustees are generally asking about tax refunds between November and April; however, one time I was involved in a bankruptcy from Louisiana and the trustee was asking about tax refunds in September and mentioned the case would be held open to see if there was a refund.

Adjusting withholdings for the remainder of the year might be the best way to protect the refund in that situation. Wherever you live, make sure you disclose any potential tax refund and plan to either protect or forfeit that refund.

Indian Trail NC Bankruptcy