Myths and Truths About Chapter 7 Bankruptcy:  Part I
Many people who are considering filing bankruptcy have misconceptions about Chapter 7 bankruptcy.  Below please find a common myth about Chapter 7 and the truth associated with that myth.
1.  Myth:  Debtors in a Chapter 7 bankruptcy must turn over their tax refunds for many years or forever after the filing of the bankruptcy.
Truth:  A Chapter 7 debtor usually receives their final discharge three to four months after the date of filing.  If a Debtor has received his/her tax refund before filing and has spent the refund on legitimate expenses, they will not be required to surrender their tax refund.  The Trustee may inquire about the purchases made with the refund so a debtor should be able to explain where the money was spent.  If the Debtor either has a tax refund pending or has received the refund but has not yet spent it, the debtor may have to turn over all or a portion of the tax refund if it cannot be exempted under the wildcard or head of household exemptions.  A debtor may not wait to file their taxes until after the filing of the bankruptcy in order to be able to retain the refund because the Trustee will wait until the taxes are filed and the refund has been received to collect the amount that cannot be exempted and close out the case.  That can prolong the bankruptcy discharge.  The Trustee will take no interest in any future tax returns in the years after the filing of the bankruptcy.  When a debtor files a bankruptcy beginning in approximately August or September through December, the Trustee can take an interest in a portion of the tax return the debtor will receive the following year because they have worked the majority of the year at that point.  The Trustee will advise if they wish to do so.  The Trustee will only take an interest in that one year and will not claim an interest in any future tax refunds.  In short, the Trustee will take an interest in one tax year at most but will not expect debtors to turn over their tax refunds for years or forever after the filing.  The exception would be if the debtor files his/her taxes for multiple years around the time of the filing.  Any refund received under those circumstances would be subject to the bankruptcy exemptions and may need to be turned over if not able to be exempted under the wildcard or head of household exemptions.
If you would like more information about this, please contact a St. Louis or St. Charles bankruptcy attorney.