Chapter 7 Bankruptcy Cases, Tax Returns And Refunds

tax return

Filing a bankruptcy case while having unfiled tax returns may cause significant problems for bankruptcy debtors in any type of bankruptcy case, whether filed under Chapter 7, 11, or 13. In Chapter 7 cases, failing to file tax returns may cause a debtor to lose a tax refund or have his or her case dismissed.

Under 11 USC § 521(e), a debtor has until seven (7) days prior to the meeting of creditors to provide a trustee with a copy of his or her most recent tax return. A Chapter 7 Bankruptcy Trustee may require a debtor to file copies of tax returns that are past due with the court, and even those going forward for some period of time. Local Bankruptcy Rule 1017-2(C) of the Southern District of Florida provides for dismissal under 11 U.S.C. §521(e)(2)(B) for the failure to provide tax returns.

At the moment a bankruptcy case is filed, most of a debtor’s assets become the property of the bankruptcy estate, which includes any unpaid tax refunds owed as of the filing date of the bankruptcy case. Thus, unless the tax refund is exempt, a Chapter 7 bankruptcy trustee may take the tax refund and distribute it to creditors.

In Florida, debtors may use the wildcard exemption under Fla. Stat. § 222.25(4), which allows a debtor to exempt any personal property up to $1,000 total, or up to $4,000 if no homestead exemption is claimed by the debtor. Thus, a debtor may claim an exemption in a tax refund, potentially up to $4,000. If the debtors are married, this exemption may be doubled to $8,000, again assuming no homestead exemption is claimed.

If there is potentially no exemption available for a tax refund, including the Florida wildcard exemption, the easiest alternative is to delay the filing of the bankruptcy case until a tax refund is received. Of course, this only works if there is no present circumstance necessitating an immediate bankruptcy filing.

Once the tax refund is received, it should be spent in full as soon as possible on living expenses such as rent, food or utilities prior to the filing of the bankruptcy case. If it is spent on an asset, then an exemption would have to available for this asset, otherwise it too, like the tax refund, would be lost in a bankruptcy case.

To schedule a free consultation at any of our three conveniently located offices, contact Loan Lawyers today by calling 954-523-HELP (4357) and speak with our Fort Lauderdale bankruptcy attorneys today.