What happens with my tax refund in bankruptcy?

There are two issues regarding tax returns in a Chapter 7 and two in a Chapter 13 that need to be commented on. Today I will simply do a short post on the one issue that overlaps in both. When one files bankruptcy, whether a Chapter 7 or a Chapter 13, all assets must be listed. A tax refund that is due to you is an asset that arose on 12/31 of the year preceding the filing date. If you are filing now, the tax refund (if you have one coming to you) arose on 12/31/2012. Even if you do not  know the amount due back to you, the right to receive it still existed on that date so you need to give a best estimate of those refunds on Schedule B.

Once you have listed your tax refunds (state and federal), you need to try to exempt them on Schedule C. Hopefully you will have enough exemptions to cover the full amount. If so, then you can keep them. Look back at some of my prior posts regarding exemptions to help with this part. You need to wait, though, until after the meeting of creditors to spend the tax refund because the trustee might have some basis for objecting, though if you calculated it correctly, this is very unlikely.

If you cannot cover the entire refund with exemptions, then you will likely have to surrender the excess to the trustee in a Chapter 7. In a Chapter 13, you will have to pay the amount you could not exempt to the unsecured creditors over the life of the plan.

Check back in a few days from now to take a look at the other issues regarding tax refunds in Chapter 7 and Chapter 13 bankruptcies.