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What can I do with my tax refund if I’m planning on filing for Bankruptcy?

Posted by Brian Hallaq | Jan 21, 2022 | 0 Comments

Fairly soon, most people will be receiving their W2 forms and they will be running to their local tax preparer in anticipation of that tax refund.  As nice as a tax refund is, it can present some problems if you are planning on filing for Bankruptcy.

As always, the best course of action is to talk to your Bankruptcy attorney but there are some general rules that you should be aware of.

First, even though you may have not received your tax refund, technically speaking you are entitled to it at 12:01 a.m. on January 1, which means that you must disclose a tax refund on your Bankruptcy schedules in one of two ways.

If you have not received your tax refund, it should be listed on your Schedule B (property list).  If you do not know how much your refund will be, estimate the amount on the high side and have your attorney exempt the entire amount.  If you've already received your tax refund, then it should be listed on your Statement of Financial Affairs under income (other than wages) that you have received.  Either way, do not omit disclosing your tax refund in your Bankruptcy paperwork.

Second, when you receive your refund there are some general best practices regarding how to use, and how not to use the money.  You should avoid paying any antecedent debts, which means any prior debt that was in existence, as opposed to ongoing debts, which are perfectly fine to pay.  For example, if you are behind on your credit card by three months, the amount you have fallen behind on would be an antecedent debt and you should be careful about paying that debt prior to Bankruptcy.  On the other hand, your current monthly electric bill would be an ongoing debt that is perfectly OK to pay.

When it comes to paying debts, you should also avoid paying any amounts to relatives or friends that you owe.  In point of fact, you should avoid transferring money to friends or family prior to the Bankruptcy case.  Oftentimes, cash, or other assets are exempt from seizure by the Bankruptcy Trustee, but when you transfer that same asset to a third person, you lose those protections, and so before you take any action like that you should consult with your Bankruptcy attorney.

Third, you should be careful about making large purchases with your tax refund.  If you do, you should be prepared to give an accounting of what you purchased and where those items are.  Some items have very little value you a Bankruptcy Trustee, such as clothing or miscellaneous household goods, but if you purchase a car, or expensive electronics, or anything that has a ready market value you should be prepared to explain that to the Bankruptcy Trustee.

At the risk of sounding self-serving, there are some things that you can use your tax refund on that will be perfectly acceptable to the Bankruptcy court.  The fees associated with your Bankruptcy case are perfectly acceptable uses for your tax refund.  Ongoing necessary medical treatment is also a perfectly acceptable use of your funds.

Just remember that while most people look forward to that great cash infusion from the tax refund, it is not a free lunch when you plan to file for Bankruptcy and some thought needs to be taken as to how you should spend (or not spend) that money.

About the Author

Brian Hallaq

My name is Brian and I have been a practicing attorney in Bankruptcy for over 20 years helping thousands of clients.  I have worked for the Chief Judge of the United States Bankruptcy Court for the Western District of Washington, as well as several small boutique Bankruptcy law firms handling Bankruptcy cases in Washington State and the State of California.  I have litigated for and against major banks, and I have recovered millions of dollars on behalf of clients in my career.

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