Tax refund season is typically the busiest time of year for bankruptcies to be filed. The reason is pretty simple, people who have been slogging along trying to pay their bills have not had the extra money to use for a bankruptcy attorney. Their tax refunds change that and finally make it possible for many people to get their cases filed.
If you are considering bankruptcy there are some things to keep in mind if you are expecting a big tax refund.
Filing a case before you receive the refund can lead to some or all of the refund having to be turned over to your bankruptcy trustee. This all depends on your state’s exemptions. Some states, Ohio for example, will allow you to exempt all of your additional child tax credit and earned income credit. Some states, Washington and New York for example, allow you to use either state or federal exemptions. If you have the option of using federal exemptions and you do not have a home with equity you can exempt a large amount which may protect your entire refund. Still other states offer very anemic exemptions and make it very difficult to file before receiving a refund.
If you file a case after you receive the refund there are other considerations. You can still use the exemptions mentioned above. If, however, you are not able to protect the entire refund, you can spend it on items that are considered reasonable and necessary. You just have to be aware that trustees will look to see if those were normal expenses that would usually be paid using your regular income. Reasonable and necessary expenses are subjective but be aware that your attorneys fees and court costs are considered reasonable and necessary.
Many people rely on their refunds to get by. If you are among them and are considering bankruptcy, make sure you speak to an attorney to protect as much of that refund as possible.
Best of Luck,
Licensed in WA and OH
Edited by Justin Vorhees