One of the most frequently asked questions by people who are planning on filing a Chapter 7 bankruptcy near the end of the year or the very beginning of the year is “what will happen to my tax refund?” When filing for a Chapter 7 bankruptcy near the end of the year or the very beginning of the year, your attorney will advise you about what will happen to your tax refund. Because many debtors are entitled to a large, lump sum of money from the government in the near future post filing, the bankruptcy trustee may take an interest in that money. This means that he or she may require you to turn over a portion of that money to the bankruptcy estate so that it can be distributed to some of your creditors.  The amount that the trustee will require you to turn over will greatly depend on a few things, including how much you receive as a tax refund, if you are filing singly or jointly, how many dependents you have, and how much property you have.  These factors influence how much you will be able to use in exemptions, which determine how much property you can keep.  Any un-exempt portion of your tax refund is what will have to be turned over to the trustee.

The first thing to consider is how much you expect to receive as a tax refund. A good way to determine this is to look at how much you received the previous year when you filed your taxes.  If your income has not changed in the past year and you do not have any more dependents than you did from the previous year, it is very likely that you will be receiving around the same amount as you did the prior year.  However, if you recently had a child, or can now claim children as dependents that you did not claim the previous year, it is likely that your tax return will increase.  Likewise, if you have received a pay increase, it is likely your tax refund will go up. Conversely, if you have recently lost your job or received a pay decrease, or can no longer claim a child on your taxes, it is likely your tax refund will go down.

Assuming you have very little personal property and/or property with low monetary value (like household goods, a car that is not worth much, or low amounts in bank accounts), you will have a significant portion of the “wildcard” exemption to use to exempt some of the tax refund you are expecting to receive. In Missouri, if you are filing a Chapter 7 singly, you will be able to use the $600 exemption to put toward exempting your tax refund; if you are married and filing jointly, you will have $1,200 to put toward exempting your tax refund.  If you have more than a one-person household, you can also use the “head of household” exemption toward exempting your tax refund.  If it is just you and a spouse, you will be able to use $1,250.  If you have children who are dependents, and are under the age of 21, you can add $350 of exemptions per child on top of the $1,250 exemption.  As an example, if you have two children under the age of 21, you would be able to exempt an additional $1,950 of your tax refund.

Determining how much of your tax refund is exempt and non-exempt is something to consult with your attorney about.  Your attorney will be able to look at your case, and give you a relative idea about how much you will be able to keep.  Many people who file for bankruptcy around tax season will end up having to turn over a portion of their tax refund.  Because of this, you may want to consider your options regarding when you are going to file.  If you are expecting to receive a large tax refund (example $5,000-$10,000), it may be in your best interest to wait to file for bankruptcy.  If you wait to file bankruptcy until after you file your taxes, receive your tax refund, and spend it, you will not have to lose any unexempt portion of the refund to the trustee. You will be able to spend the tax refund on things you were planning on spending it for that are legitimate expenses, such as car or house repairs.

However, if you decide not to wait to file, and end up having an unexempt portion of your tax refund, it is imperative that you speak with your attorney about what that decision means.  If you have an unexempt portion of your tax refund, it is important that when you receive that money, you do not spend it! When you file your bankruptcy petition before you receive your tax refund, you list it as property that you are expecting to receive, so the amount listed is not an exact number.  Your attorney can give you an estimate of what you will be able to keep; however, they can’t give you an exact number since you will not know for sure what you will receive until you receive it.  Because of this, you will want to hold onto the money until you receive notice from your trustee about how much you will have to turn over.  Your trustee will be able to look at your tax refund and your bankruptcy petition, and give you an exact amount that he or she wants for the bankruptcy estate.  The trustee will send you and/or your attorney a notice that tells you how much you need to send in to him/her.   Once you receive this notice, you must send in the amount requested.  Your trustee may keep your case open until he or she receives this money.

Debtors should also keep in mind that the trustee requesting this money is not something that will go unnoticed if it is not paid.  Some debtors think that if they simply do not pay the trustee the unexempt portion of their tax refund, the trustee will not notice or just will not do anything.  This is not the case.  Additionally, some debtors think that if they spend the tax refund before the trustee requests the unexempt portion, there is nothing that the trustee can do.  This is also not the case.  In fact, if you decide to spend all of the unexempt portion of your tax refund, the trustee will make you pay that money back.  Many trustees will be willing to work out a repayment plan; however, they will still receive that money from you, one way or another.  If you still decide not to pay the trustee at this point, your trustee will file a complaint with the United States Bankruptcy Court and request that your discharge be revoked.  If this happens, you will not only be responsible for paying back all of your creditors again, but you will also not be able to file a Chapter 7 bankruptcy on those debts to have them discharged again.

With this being said, it is important to put things into perspective; even though it may not be ideal that the trustee is taking a portion of your tax refund, you are still going to be able to get rid of any unsecured debts that you owe.  For many people, a trade off of a couple thousand dollars definitely beats having to pay tens of thousands of dollars to creditors.

Determining how much of your tax refund you can keep can be somewhat complicated since it greatly depends on so many factors.  If you would like information about how your tax refund will be handled through a chapter 7 bankruptcy, contact a St. Louis bankruptcy attorney today!