This time of year, a lot of my clients are getting big tax refunds. Like, HUGE tax refunds. In the last few days I've had clients call me and tell me of refunds in the $7,000 $8,000 and even a few with over $9,000 in state and federal tax refund. Thankfully, most of my clients call me before they spend those refunds because how they spend the money can have major complications and consequences in either a chapter 7 or chapter 13 bankruptcy.
If you have already filed your case and are now getting the refund back, your options are very limited. In almost every chapter 7, you'll probably need to hand over most of the refund to your chapter 7 trustee. In a chapter 13, you'll need to give the trustee everything over $1,000 (or possibly $2,000 if your chapter 13 was filed after 12/1/10.)
If you haven't yet filed your case, you definitely need to consult with a bankruptcy lawyer about how to spend the money. DO NOT pay any of the money to friend or family members you might owe. That' is the single biggest problem people get into with their bankruptcy trustees. Paying friends or family is called a preferential transfer to an insider and doing so allows the Trustee to sue that person to get the money back.
So what to do with all the tax refund money? Spend it and keep your receipts. Ask your lawyer what is a safe way to spend it, but here are a few generally safe categories: food, medicine, medical procedures like braces or glasses, clothes, one months' worth of regular bills like gas and electricity, home improvements, car repairs and certain kinds of home furnishings and appliances. Again, it is always safer to ask a lawyer what to spend it on.
