What About My Tax Refund?
If you are like many Americans, you may have received a tax refund when you filed your federal or state income tax return. What happens to this money when you file bankruptcy? The answer to that question depends on when you file.
How Your Tax Refund Is Handled in Bankruptcy
Under the Bankruptcy Code, any cash, including your income tax refund, must be made a part of the bankruptcy estate. Therefore, if you receive a refund before filing bankruptcy, you must declare this money as part of your cash on hand when you file. It is treated the same way as money in bank account. The year you file bankruptcy, there can be a change in this pattern, however. If your refund was based on income earned after the bankruptcy filing date, you may keep that refund amount. It is important that you have documentation to support when you earned the income relatively to when you filed bankruptcy, as you will be asked to produce this information before receiving a discharge. Finally, the year after you file for bankruptcy, you may keep your full refund amount.
Should I Consider My Tax Return When Scheduling My Bankruptcy?
Depending on your income, you may be in line for a relatively large tax return, particularly if you are eligible to receive Earned Income Credit or credit for education costs. Therefore, it may make sense to think about when you want to file your bankruptcy in order to make the most of your tax return. While it might seem sensible to wait on filing a bankruptcy until you have collected and spent your tax return, there are other considerations of which you should be aware when you choose your filing date. For example, if you wait to file bankruptcy, you will not receive the protection of a stay, and creditors may be able to garnish your bank account and take your return. The chances are that your return is not large enough to satisfy your creditors, however, so filing bankruptcy and including the return as part of your estate may actually allow you to keep more money. The best way to make this important decision is to speak to a bankruptcy attorney. The experienced bankruptcy lawyers at Oswalt Legal Group in Phoenix can help you decide when is best to file your bankruptcy and how to protect as much of your money as possible.