Can You Keep Your Tax Refund After Filing Chapter 7?

Have you had to file for chapter 7 recently but found yourself expecting a tax return? Or are you considering filing for bankruptcy but are concerned about what will happen to your tax refund? You aren’t alone!

Many people considering or filing for bankruptcy find themselves wondering about cash flow that they are waiting on or might come into in the future.

You want to know what is yours to keep, what the state can take, and how you will survive after declaring bankruptcy. It’s a scary time, and often you are left alone with thoughts constantly racing through your head. 

Can you keep your tax refund after filing chapter 7?

Well, no more! Today we are here to put your mind at ease and get you the answers you need! We will look at if you can keep your tax refund after filing chapter 7 and other factors you need to be aware of. Keep reading to find out what happens to your tax refunds post-bankruptcy.

Can you keep your tax refund after filing chapter 7?

Let’s get straight into it: yes, after filing chapter 7, you can keep a tax return! Should the tax return arrive after you have filed for bankruptcy under chapter 7, you can keep it. But, it isn’t as easy as you think! 

As you have declared bankruptcy, anything passing through your account or that you own is considered an asset and can be seized if needed.

And your tax refund is included in this. Whether you have already received it or the tax refund is still being processed, it is still considered an asset and can be taken unless you protect it with a bankruptcy exemption. 

Bankruptcy exemptions protect the fund or asset from being seized, leaving you with some cash or a place to stay if needed.

The laws in your state determine these exemptions, so you must check these before proceeding. You can usually check on your state’s website or with your appointed bankruptcy trustee if you wish. 

Now, tax exemptions can be tricky to protect in a bankruptcy exemption, so you must do your research beforehand. Some states will have a specific exemption for a tax refund; others will not.

Whether or not you can keep the tax refund will vary depending on when the tax refund is from. If the return is from after declaring bankruptcy, then usually it’s yours to keep. We can take a closer look at this now. 

Keeping tax refunds after filing chapter 7 – when is it for?

As we touched on earlier, there are ways for you to keep your tax refund after filing for chapter 7, and you need to check these with your state. But another factor you have to consider is when the tax refund is for.

In some cases, that money is rightfully yours and cannot be seized with your other assets; in other cases, it can rightfully be taken.

Let’s look at when your tax refund is from to help determine if you can keep it or not. 

The year before bankruptcy – if the tax refund comes from before you filed chapter 7, it’s considered like money in your bank account and is given directly to the state. 

Year of bankruptcy- if it’s from before the filing date, it goes to the state. If the tax refund is dated later, you can keep it. You might also be able to protect it with a bankruptcy exemption that we discussed earlier. 

Year after bankruptcy – you can keep the full refund in this case, as the money has been calculated based on your earnings after filing for bankruptcy.  

To work out what tax year your refund is from, check the dates on any letters or documentation you have received.

The tax year is usually stated at the top of these documents and will allow you to see quickly if the tax refund is rightfully yours or if it will be seized as an asset to pay your debts. 

If you are concerned or have more questions, you can take them to a legal expert or your bankruptcy trustee. They will have a better understanding of your situation and provide you with tailored advice if needed. 

What to do with a tax refund before filing for bankruptcy?

If you are considering or about to file for bankruptcy and expecting a tax refund, there are a few things you can do with the money.

Firstly, you can see if the money is covered by a bankruptcy exemption, leaving you with some cash after filing for bankruptcy. 

You could also adjust your tax withholding. If there is enough time to do so, it will avoid the refund issue altogether! Instead, you will only pay the tax that you owe.

Adjusting your withholding will provide you with more money in each paycheck, allowing you to pay for necessary expenses.

But take care when doing this, as there still needs to be enough money to cover the taxes you owe when the time comes. 

Another option is to spend the refund before filing for bankruptcy. You need to be smart here and only spend the refund on necessary items.

If you don’t, the assets will be seized when you declare bankruptcy. So what can you spend the tax refund on? Any of the following will be classed as an essential item: 

– Mortgage/rent payment or home repair
– Utilities 
– Food 
– Medical care
– Clothing 
– Education costs
– Car payments and maintenance 

Using the tax refund on any of the above before filing for bankruptcy is an excellent way to spend the money without the assets then being seized from you/ avoid purchasing luxury goods, making multiple rent payments, or repayments on a credit card. 

Each state does have different rules about this, so check before spending the money!

Final Word

And just like that, we have come to the end of our tax refund journey today. As you can see, you can keep a tax refund after filing for chapter 7, providing it is appropriately protected or from the financial year after you filed for bankruptcy. 

Remember to check the laws in your state and to speak to a professional if you have any queries or concerns. 

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