Will A Chapter 7 Bankruptcy Trustee Take My Tax Return? How To Keep Your Tax Return In Bankruptcy.

Do I lose my tax return in bankruptcy?

Will the chapter 7 trustee take my tax refund?

How can I keep my tax return in bankruptcy?

 

Every January without I fail I am bombarded with questions regarding tax refunds. Specifically, potential chapter 7 bankruptcy clients are often concerned about whether a bankruptcy trustee can take their tax return. This year is no exception.

In honor of this event, I have written you a pair of haiku (I hope you’re proud, Mrs. Merrill) that hopefully shed light on the issue:

 

The start of the year,

a season loved by trustees.

Tax refunds galore.

 

Filed for bankruptcy,

have not yet filed my taxes.

Bye-bye tax refund

 

Fun, huh? There is some information to be learned here. If you file for chapter 7 bankruptcy protection after the first of the year but before you receive and spend your 2011 tax refund (that is, the check you will get in 2011, based on your 2010 wages), the bankruptcy trustee is entitled to that money as part of your bankruptcy estate.

Note that if you file December 30th the trustee will be entitled to the vast majority of it as well, but we will save that discussion of prorated tax refunds for another day.

What should your Phoenix bankruptcy lawyer recommend? If feasible, delay filing for bankruptcy protection until you have filed your taxes, received your refund AND spent it on exempt property.

When should you completely disregard this advice? When the loss of tax refund is the least of your worries. This may seem like common sense, but common sense isn’t always that common.

If your wages are being garnished or your bank accounts levied…if you are facing foreclosure on your home or repossession of your vehicle…it may be in your best interest to forget about the tax return, and get your bankruptcy filed. ASAP.