Tax Refunds and Bankruptcy

It's tax refund time and a whole lot of my clients are wondering what they should do with their tax refunds.  The answer is:  it depends.

If you have already filed your chapter 7 case, it's highly likely that your trustee has or will direct you to turn over at least a large portion of your refund.  That's his right and your failure to do so will put your case in serious jeopardy.

If you haven't yet filed your case and you are thinking about chapter 7, you should talk to your attorney about the tax refund.  Tell your lawyer how much you expect to receive and when you expect to receive it.  If you can hold your creditors off for a while longer until you get your refund, it often makes sense to delay filing your bankruptcy until you get your tax refund and spend it down.  The bankruptcy trustees don't like it because they want that money, but with a bit of planning this technique is permissible.

There are quite a few things you can usually safely spend your tax refund on:  one month's worth of regular utility bills, mortgage, rent or car payment, medicine, medical procedures, home or car improvements (within certain limits), bankruptcy fees and costs, and other outstanding bills less than $600.  Make sure you keep your receipts for how you spent it.  DO NOT spend the money to pre-pay regular monthly bills.  DO NOT use the money to pay back friends or family on loans they might have given you up to this point.  As long as you spend the money on permissible expenditures and keep records of your payments, the bankruptcy trustee will probably leave you alone.  You should always talk to your lawyer before you spend even one cent of your tax refund just to make sure it's not going to come back and bite you in your subsequent chapter 7 case.

If you are in a chapter 13, you need to ask your attorney how much of your refund you are entitled to keep.  In Utah, for cases filed before December 1, 2010, you ordinarily get to keep $1,000 of your state and federal combined refund, and the rest the you must send in with your regular monthly bankruptcy plan payment.  For cases filed after November 30, 2010, the bankruptcy trustee is allowing people to keep up to $2,000 of your state and federal combined refund so long as at least $1,000 of that refund is from the earned income or dependent child credit.    These are just general guidelines applicable to most chapter 13 cases; check with your lawyer to get the specifics applicable to your case.