Can I Keep My Tax Refunds If I File Chapter 7?

Tax season is here again. Understandably, people filing or considering filing Chapter 7 are concerned about losing their tax refunds. The good news is that if done properly, the bankruptcy filing will most likely not cause the loss of a tax refund. Most debtors lose their tax refunds because they fail to properly disclose and exempt the tax refunds, which is common when attempting to file without an attorney or when hiring an inexperienced or careless bankruptcy attorney.

The Bankruptcy Estate

Upon filing a bankruptcy, all of the debtor's assets become property of the bankruptcy estate. The bankruptcy estate is administered by a person called a trustee. It is the trustee's job to liquidate assets for the benefit of the debtor's creditors. The Bankruptcy Code defines assets very broadly. Assets include things a debtor owns at the time of filing, will own in the future, or could own upon some event occurring. What is considered an asset is not always obvious to a layman, which is why it is so important to hire an experienced and thorough bankruptcy attorney.

What Tax Refunds Are Part of the Bankruptcy Estate

Tax refunds, or the right to receive tax refunds, are an asset in almost every Chapter 7 bankruptcy. Most debtors understand that tax refunds that they are holding at the time they file bankruptcy are an asset. Most debtors also understand that tax refunds that they will receive during the same calendar year they file bankruptcy are an asset. What most debtors do not realize is that a portion of the tax refunds associated with the calendar year the bankruptcy petition is filed are also an asset. In other words, if you file bankruptcy in 2014, a portion of the 2014 tax refunds which will be received in calendar year 2015 are part of the bankruptcy estate.

A debtor's marital status and how they file tax returns can also have an impact on how much of the refunds are part of the bankruptcy estate. Typically, if a married individual files bankruptcy without their spouse and the tax returns resulting in refunds were filed jointly, only 50% of the refunds are considered assets of the bankruptcy estate.