Can You Keep a Tax Refund When You File a Chapter 7 Bankruptcy?

Are There Ways to Avoid Losing Your Refund to Pay Creditors?

You’re facing dire financial circumstances—maybe you’ve lost your job or you’ve been sick or injured. You’ve pretty much decided that the best way forward is through a Chapter 7 bankruptcy, where you can permanently rid yourself of some of your debts. But every penny matters at this point and you have a nice tax refund coming. Can the bankruptcy trustee take your refund, even if you don’t have it at the time of your filing? Is there a way to keep your refund?

Can You Lose Your Income Tax Refund When You File for Protection in Chapter 7?

Yes, you can. In fact, bankruptcy trustees tend to keep an eye out for tax refunds with most Chapter 7 filings, as they are a reliable way to bring in cash to satisfy creditors.

How Can You Keep the Trustee from Taking Your Refund?

There are generally three ways to prevent your income tax refund from being used to pay off your creditors in a Chapter 7 bankruptcy:

• Minimize your withholdings, so that you don’t have a refund—You can have your employer withhold less during the year, so that more goes into your pocket, generating a smaller refund. You want to be careful, though, that you don’t end up owing a significant tax bill. You cannot discharge the tax debt.
• Wait to file until after you have received and spent your refund—If you receive a refund before you file, you can spend it without any penalty, provided you spend it on necessary items. If, however, you spend it on luxury items or to pay off preferred creditors, your petition may be denied for bad faith.
• You can use available state or federal bankruptcy exemptions to offset the amount of your return

Contact Attorney Howard N. Sobel

At the office of Howard N. Sobel, we provide personal bankruptcy counsel to men and women throughout the state of New Jersey. Contact our office online or call us at 856-424-6400 to set up a free initial consultation. Evening and weekend appointments can be arranged upon request. We accept all major credit cards.

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