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Can I Keep My Tax Refund When I File for Bankrutpcy?

When we meet our clients for bankruptcy consultations we go through a lot of information. However, we find that many of our clients want to know what kinds of information to bring with them to consultations to make it more efficient. During this time of year especially we get a lot of questions about tax returns. It is important to understand that every case is different. This is meant only to be used for general information purposes, and if you have questions about this or your case you must contact us today to go over your specific circumstances.

That being said, when an individual files for bankruptcy he has to declare all of his debts or liabilities and all of his assets on the petition filed with the court. A tax refund, even one that is not yet received, is an asset that must be disclosed. We know that a lot of our clients depend on tax refunds for important purchases, car repairs, and other household items. That is why we encourage you to tWhen we meet our clients for bankruptcy consultations we go through a lot of information. However, we find that many of our clients want to know what kinds of information to bring with them to consultations to make it more efficient. During this time of year especially we get a lot of questions about tax returns. It is important to understand that every case is different. This is meant only to be used for general information purposes, and if you have questions about this or your case you must contact us today to go over your specific circumstances.

That being said, when an individual files for bankruptcy he has to declare all of his debts or liabilities and all of his assets on the petition filed with the court. A tax refund, even one that is not yet received, is an asset that must be disclosed. We know that a lot of our clients depend on tax refunds for important purchases, car repairs, and other household items. That is why we encourage you to talk to us. You can attempt to rid yourself of assets prior to filing for bankruptcy. But you are able to make some legitimate purchases and or repairs. It may be in your best interest to wait until after you have received and used your refund money to file for bankruptcy.

If that will not work, there may be other ways to protect the money from needing to be turned over to the trustee as a part of the bankruptcy estate. There are certain exemptions that may be used to protect certain amounts of assets, including liquid assets. Those exemptions vary by state, and we practice in Missouri and Illinois, so we’ll have to go over those with you individually.

It is also important to understand where there are some cases where it would be in a debtor’s best interest to file bankruptcy before receiving the tax refund. For example, in Illinois certain types of tax credits, including the Earned Income Credit (EIC) are exempt from the bankruptcy estate and the debtor is entitled to keep any money from the EIC, regardless of amount. A bankruptcy judge in the Southern District of Illinois recently ruled that where a debtor received her refund just hours before she filed that the debtor could not keep the money from the Earned Income Credit because once she has the money in her hand it was simply liquid assets, not an Earned Income Credit. In this case it would have been much better for the debtor to file her bankruptcy before receiving her tax refund. This is a very technical interpretation, but this case may set an interesting precedent for future cases.

If you have questions about this, or any other bankruptcy questions, please call a St. Louis Bankruptcy Attorney today to talk to us. You can not attempt to rid yourself of assets prior to filing for bankruptcy. But you may be able to make some legitimate purchases and or repairs. It may be in your best interest to wait until after you have received and used your refund money to file for bankruptcy.

If that will not work, there may be other ways to protect the money from needing to be turned over to the trustee as a part of the bankruptcy estate. There are certain exemptions that may be used to protect certain amounts of assets, including liquid assets. Those exemptions vary by state, and we practice in Missouri and Illinois, so we’ll have to go over those with you individually.

It is also important to understand where there are some cases where it would be in a debtor’s best interest to file bankruptcy before receiving the tax refund. For example, in Illinois certain types of tax credits, including the Earned Income Credit (EIC) are exempt from the bankruptcy estate and the debtor is entitled to keep any money from the EIC, regardless of amount. A bankruptcy judge in the Southern District of Illinois recently ruled that where a debtor received her refund just hours before she filed that the debtor could not keep the money from the Earned Income Credit because once she has the money in her hand it was simply liquid assets, not an Earned Income Credit. In this case it would have been much better for the debtor to file her bankruptcy before receiving her tax refund. This is a very technical interpretation, but this case may set an interesting precedent for future cases.

If you have questions about this, or any other bankruptcy questions, please call a St. Louis Bankruptcy Attorney today!


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