Depending on how you handle it, some or all of your refund may be protected; if you wind up filing for bankruptcy, you are permitted to use your tax refunds to pay for your bankruptcy attorney fees and court costs.
Tax refunds are particularly tricky to deal with, because you may owe tax from a time prior to your bankruptcy, and you may continue accruing taxes after you file. Whether you get to keep your refund depends on factors such as when you file, when you receive your refund, and whether you can use available Ohio exemptions.
Having the help of a knowledgeable professional is essential to keep from having problems that could even lead to having your bankruptcy revoked. The skilled and seasoned Ohio debt-relief attorneys at Fesenmyer Cousino Weinzimmer understand that even the most well-intentioned people can make mistakes with money. We offer a free consultation to evaluate your situation and help you take steps that enable you to not only keep your tax refund, but get you on the path to reaching your financial goals.
Chapter 7 and Refunds
With a Chapter 7 bankruptcy the bankruptcy trustee liquidates all your nonexempt assets and uses the proceeds to pay your creditors. Any eligible debts that remain are discharged, and you don’t have to pay them.
In Chapter 7, a tax refund is an asset that can be used to pay creditors. Although you can keep any assets you receive after filing for bankruptcy, a tax refund often involves a process that begins before the bankruptcy filing date and continues afterwards.
If you cannot exempt your refund, whatever is not protected must be handed over to the bankruptcy trustee. If you don’t do this, your bankruptcy discharge will be revoked, and you will continue to owe your debts.
How to Exempt Refunds in Chapter 7
In Chapter 7 bankruptcy, income tax refunds that you received before filing, and income tax refunds that are due to you for the portion of the tax year before you filed for bankruptcy are part of your bankruptcy estate. The bankruptcy trustee may take refunds to repay your unsecured creditors, unless you can protect them by doing the following:
1) Use your applicable exemptions
There are certain exemptions that can protect your tax return when filing bankruptcy. A knowledgeable bankruptcy attorney can review these exemptions with you.
2) Coordinate Timing
If you plan ahead properly, you should be able to keep your tax refund or use the money for bankruptcy or other expenses. Before filing, make sure that you either:
- increase withholding to reduce your refund to a minimal amount
- spend the refund on necessary expenses, such as rent, home repair, utilities, medical expenses, food and clothing
- include the refund in your bankruptcy exemptions.
Chapter 13 and Refunds
In Chapter 13 bankruptcy, you don’t give up your assets. Instead, you pay some or all of your debts through a three- to five-year repayment plan. Any eligible debt left over is discharged.
In a Chapter 13 bankruptcy, your tax refund can be used to determine how much you must pay back to your creditor when you originally file. Additionally, you are required to use all your disposable income to fund the plan so any tax refund you receive while you are in the plan is subject to turnover.
Fortunately, bankruptcy law allows you to modify a Chapter 13 plan to excuse payment of tax refunds in certain circumstances. You can file a motion to retain for necessary living expenses to excuse the tax refund or include language in the plan that excuses tax refunds. But you must use the refund for something necessary that is unexpected and not in your current budget.
Motion to retain income tax refund should:
- specify which tax refund you need to excuse
- the amount of the refund, and
- why you need to keep the money.
Examples of situations in which you may excuse a tax refund:
- car repair
- appliance repair
- replacing a furnace
- unexpected medical or dental expenses for yourself or your children.
Keep all documentation of how you spent the money. If you include the money in your bankruptcy plan you will have to show the court you have a compelling reason to do so.
Tax tips for bankruptcy
- Consider filing your taxes before filing for bankruptcy, unless you will be getting a big refund.
- If you have already filed for bankruptcy, give your attorney your tax records, and make sure you can explain how you used any refund money.
- If you have already gotten a refund and you are considering bankruptcy, do not pay bills with the money or it will slow the processing of your bankruptcy case.
- File your taxes on time each year.
The experienced and compassionate Ohio debt-relief attorneys at Fesenmyer Cousino Weinzimmer know how difficult it is to make good financial decisions. We offer a free consultation to evaluate your entire financial situation by examining your income, your debts and your goals, and we will help you find what works best for you.
As with other financial decisions, consider the long-term benefits from your tax refund, instead of your short-term desire to spend. Using your refund to file for bankruptcy may be the best way to get out of debt, stay out of debt and make smart choices going forward.
To learn more about how our firm can be of assistance, call one of our conveniently located office branches at 614-228-4435 (Columbus), 937-222-7472 (Dayton), or 877-654-5297 (Cincinnati) or email for your free consultation so we can determine what solutions will work best for you.