Now that tax season is upon us, can I lose my income tax refund when I file for bankruptcy?

Now that tax season is upon us, can I lose my income tax refund when I file for bankruptcy?

When someone decides to file for bankruptcy, timing is everything. After the start of the new year, many people experience shopper’s remorse from their holiday spending spree and decide they need to file for bankruptcy on their New Year’s resolution. This happens almost every year after reality sets in and there just isn’t enough money to make ends meet. What these people don’t think about is that tax season comes quickly after the new year, and those who rely on their tax return as a windfall usually won’t think about it before they file for bankruptcy. That’s why it’s a good idea to cover all the bases and ask the question, can I lose my income tax refund and file for bankruptcy?

The simple answer to this question is yes. That’s why it’s important to have a bankruptcy attorney help with the individual file. A bankruptcy attorney will know when to file the petition to protect the income tax refund if needed. Any income becomes part of the bankruptcy estate when you file for bankruptcy. In fact, the trustee usually looks back six months and money received during that time will be considered income. Even worse, a big fat check from the government that isn’t protected by the bankruptcy laws is fair game for the receiver to use to pay off creditors. When filing Chapter 7, a bankruptcy attorney will look at all cash, savings, and any other assets that can be easily liquidated and protect those who take advantage of the bankruptcy laws. Where there is a problem is when a person doesn’t think about an income tax refund that is on the way from the federal or state government and the receiver discovers it. If the lawyer doesn’t know about it, it will most likely go unprotected and be swallowed up.

That’s why it’s really important to make sure a person has an attorney they trust and feel comfortable sharing intimate financial details with. Holding back is not an option. Trying to hide a credit card or some property on the side will only end in disaster in a declaring bankruptcy. In this highly technological world, trustees have many tools in their bag of tricks to obtain information about the bankrupt. The last thing a person wants to hear at a 341 meeting is that the trustee has discovered assets or income that were not disclosed. The lawyer will get flustered, as will the debtor, and the digging will begin.

Just because someone plans to get their tax refund doesn’t mean they shouldn’t still file bankruptcy if absolutely necessary. Most states allow generous exemptions to protect an equitable share of property, including a wildcard exemption that can be used for anything, including an income tax refund check. As the economy gets tighter, most people rely on this annual refund as crazy money or, for the frugal, just a way to make themselves more comfortable for a few months. The amount of those checks will likely decrease over the next few years as the Affordable Care Act goes into effect. It will cost every American more money to help pay for health care, leaving less to give back at the end of the year. The bottom line is, if someone needs to file for bankruptcy, then file. They should speak with a bankruptcy attorney and be completely honest about any possible windfalls that may be in their future so that the attorney can plan accordingly and even delay filing the petition if necessary.

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