Starting in September of each year, when clients come in asking about bankruptcy one of the questions we ask is whether the prospective client expects to receive a tax refund for the upcoming tax year. If the answer is yes, we ask how much.
For a Chapter 7 for example, if someone comes in and says they expect a $4,000 tax refund and they want their bankruptcy filed on September 1st (the 244th day of the year), we explain that 244/365 about 67% ($2,673.97) of the tax refund for the next year is part of the bankruptcy estate.
Does this mean the trustee automatically gets over $2600 of this client’s refund? No. The court gives you certain exemptions to keep property, including money in a bank account or an expected tax refund. The amount of these exemptions vary case by case depending on whether you are head of household and whether you have dependents under the age of 18. This is something that you will need to consult your attorney about to determine for your specific case how much could be protected.
So lets say the client expects $4000. This client is not head of household and does not have any dependents. The amount that could be protected would be limited to a $600 wildcard exemption. This client may want to wait to file the bankruptcy after they have received and spent their tax refund. Once it is spent, we no longer need to exempt it and the trustee cannot take it.
However, if this is the route you chose to go, it is important to be cautious of what you are spending the money on. You cannot make payments to family members or friends and do not want to pay any creditor more than $600. You can however pay normal expenses: rent, utilities, necessities for yourself or dependents, etc. If you are not sure whether the bills you plan to pay with your tax refund and acceptable, contact your bankruptcy attorney.