Texas allows you to choose between Texas tax exemptions and federal tax exemption rules. If you choose Texas exemptions, you may be unable to keep the refund. But if you choose federal exemptions, you may keep the refund under the wildcard exemption, which allows you to exempt up to $1,150 in personal property and up to $10,825 of unused federal homestead exemption. Discuss which exemptions to choose with your attorney.
Protecting your tax refund when you are filing for bankruptcy can be a tricky endeavor. Your tax refund will be viewed by the court and/or trustee for your case as an asset and may be seized as part of your case. However, there are actions you or your attorney can take to try to protect your refund.
Multiple factors can affect your ability to keep your tax refund including when you file your bankruptcy, what type of bankruptcy you are filing and what measures you take to keep your refund protected in the process.
The likelihood that you will be able to keep your tax refund may be linked to the type of bankruptcy you are filing. Chapter 7 bankruptcies offer greater opportunity to protect an asset such as a refund while Chapter 13 bankruptcy can be trickier to navigate if you’re hoping to protect your refund.
When You Should File for Bankruptcy Under Chapter 7
For a Chapter 7 bankruptcy, the time when you file your paperwork with the court can affect your ability to protect your tax refund. But you can claim “exemptions” as part of the bankruptcy process. Exemptions are protected assets that you are allowed to keep after your bankruptcy is complete.
If you are not able to use an exemption to protect your refund, discuss one of the following strategies with your lawyer.
- File your bankruptcy paperwork after tax season: If you are able to wait until you’ve filed your taxes, received your refund and spent it, you will not have to list is as an asset in your bankruptcy. Be sure to use the money from the refund for living expenses, though (costs such as mortgage payments, clothing, food or attorney fees). If you acquire new assets with the refund money, you may be lose them in your bankruptcy proceedings.
- Adjust your withholding amounts to receive a smaller refund: If you find yourself faced with bankruptcy proceedings in the last quarter of the year, the court or trustee may estimate your refund amount and list it as an asset. To reduce the amount of refund you will receive early in the following year, you can adjust your withholdings to put more cash in your pocket now and reduce the amount of your refund. Another tactic is to allocate more of your income into retirement plans such as an employer-managed IRA or 401k program.
When to File for Bankruptcy Under Chapter 13
If you are filing a Chapter 13 bankruptcy, there may be little you can do to protect a tax refund. The trustee assigned to your case will review your tax returns for the time period you are on your repayment plan (between three and five years) and may take your tax refund for any of those years. If you are on a repayment plan that pays back less than 100 percent of your debt to listed creditors, the likelihood that your tax refund will be taken by the trustee is increased.
As with a Chapter 7 bankruptcy, you can always decrease the amount of withholdings you have taken out of your paycheck in order to keep more money in your bank account and decrease the amount of your refund each year.
Warren & Migliaccio Can Help with Bankruptcy Law Matters
If you are concerned about when and how to file for bankruptcy, consult an attorney with expertise in bankruptcy law. The laws and regulations governing bankruptcy are complicated and diverse. Warren & Migliaccio will review your case and can help you through the process. Call 888-584-9614 to schedule a free consultation or use our online contact form to do so.
