Many people look forward to getting their tax refunds every year to catch up on necessary expenses, buy clothing for their children, pay tuition, and other necessities. Before filing chapter 7 bankruptcy, it is important to take certain factors into consideration to avoid losing your long-awaited tax refund to your creditors.
When you file bankruptcy, everything you own (including cash, equity in vehicles, jewelry, furnishings, business interest, and yes, tax refunds) are put into a proverbial bucket called the “bankruptcy estate.” It does not mean that you lose everything you own! However, there are limits to what you can keep when filing a chapter 7 bankruptcy. If your assets are beyond those limits, the trustee may assert an interest in the non-protected portion for the benefit of your creditors. Bankruptcy law gives you allowances or protections referred to as “exemptions” and if your assets fit into those exemptions, you get to keep them. Generally, bankruptcy filers in Florida are allowed $1,000 for equity in a vehicle, $1,000 for personal property (such as the items mentioned above), and if you do not own your home, you are allotted an additional exemption of $4,000 to apply to just about anything you own. Married couples filing bankruptcy jointly get double these exemptions.
If all of your assets fit within these exemptions, you can generally keep them. If your assets exceed the exemptions, the bankruptcy trustee (administrator) may collect the amount not protected, to pay some of your debt.
Earned Income Credit
In addition to these exemptions, there is another exemption only applies to tax refunds – the earned income credit. This amount of the tax refund, if any, is protected and the rest may be protected with the general exemptions. For example, let’s say you are expecting to receive a tax refund of $7,000, with an earned income credit of $5,000. The $5,000 is protected. The remaining $2,000 may be protected with the other exemptions and you would get to keep the entire tax refund. There are various factors to consider. Timing is very important – when you receive the tax refund and also the timing of your bankruptcy filing can make or break your chances of keeping the tax refund.
Another way to avoid losing your tax refund is spending it on necessary and reasonable living expenses (and even bankruptcy attorney’s fees) before filing for bankruptcy. Do not, however, spend it on luxury items or repaying family or friends as this will cause more problems in your case.
If timed correctly and exempted appropriately, you may be able to keep your tax refund despite the bankruptcy filing. If you are anticipating a significant tax refund, you should consult with an experienced bankruptcy attorney in your area to go over your particular case. This article does not constitute legal advice as every case is different, different states have different exemptions, and there are many variables to consider.
Loan Lawyers has helped over 5,000 South Florida homeowners and consumers with their debt problems, we have saved over 1,800 homes from foreclosure, eliminated $100,000,000 in mortgage principal and consumer debt, and have collected millions of dollars on behalf of our clients due to bank, loan servicer, and debt collector violations, negligence and fraud. Contact us for a free consultation to see how we may be able to help you. Call us at 1-888-Fight13 (344-48130).