Can I Keep My Tax Refund After Filing Chapter 7?

Your tax refund is based on money that you’ve over-paid in taxes throughout the course of the calendar year. As you reach the end of the year, you’d like to get as much of that money back as possible. Unfortunately, if you’ve filed for bankruptcy, you may find yourself wondering if you can keep any of the money from your tax return. Whether you can keep any of the money from your tax return depends on several factors.

When Did You Earn the Money?

In order to establish whether you can keep the funds from your tax return, you’ll first look at when you earned the money included in that refund.

If you earned the money in a calendar year prior to the year you filed for bankruptcy, your refund will go to the estate. If, for example, you got behind on filing your taxes and needed to file an extension–or simply needed to get caught up–you may have a refund due for previous years. You may also, for example, file for bankruptcy early in the calendar year–say, in February–and then file your tax return in March or April. Because the money was earned before you filed for bankruptcy, it will go to the estate and may be used to help repay some of your debts.

If you earned the money in the same calendar year as your bankruptcy, you may get to keep part of your tax return, but not necessarily all of it. Suppose, for example, that you filed Chapter 7 bankruptcy in July of the previous year. When you file your taxes for that year, whether you file in January or as close to the April deadline as you can, you can keep the refund on income earned after you filed for bankruptcy (in this case, income earned in August through December), but not the refund on income earned prior to your bankruptcy (that is, in the example, income earned in January through July of the year you filed for bankruptcy).

If you earned the money in the year after you filed for bankruptcy, the refund is yours to keep and use as you see fit. Just as you will not lose income earned after your bankruptcy to your lenders, you need not pay your tax refund to the estate.

Can the Money Qualify as an Exemption?

In some cases, you can keep some cash on hand when you file for Chapter 7 bankruptcy. Some states offer a specific exemption that will allow you to keep some cash–usually a minimal amount–when you file for bankruptcy. This will allow you to keep enough cash on hand to continue paying some of your bills or to ensure that you have enough to pay living expenses. Pennsylvania allows you to keep $300 in cash as a wildcard exemption when you file Chapter 7 bankruptcy. While your tax return may well exceed the amount you’re able to keep on hand in cash, Pennsylvania offers some other exemptions that can help you keep as much cash as possible.

If you believe your tax refund may qualify as an exemption, consult with an experienced bankruptcy lawyer to learn more. While these exemptions do exist, an attorney can help you find and identify them more effectively–and ensure that you do not make a costly error in the process.

How Can You Keep More of Your Tax Refund?

Many people use their tax refund as a sort of extended savings account: they pay extra on their taxes each year both to ensure that they do not end up owing at the end of the year, and to help have a little extra in the bank when that tax return comes in. Tax returns are often used for vacations or to fund big purchases that just aren’t possible during the rest of the year. While keeping that extra money in the year that you file for bankruptcy can be difficult, there are several strategies you can use to make the most of your refund.

1. Adjust what you’re withholding. Work with an accountant or someone within your company to determine how much extra you should receive at the end of the year and adjust your withholding accordingly. Make sure that you continue to withhold enough to cover what you’ll owe in taxes by the end of the calendar year, but do not withhold additional funds. This will leave you with the extra funds in your paycheck, rather than waiting until your tax return comes in at the end of the year.

2. Use your refund on key expenses, if you haven’t yet filed for bankruptcy. Prior to filing for bankruptcy, you can use your tax return on necessary expenses: paying your mortgage, paying off some of your debts, or taking care of home repairs, groceries, or other necessary expenses. You cannot protect the refund if you use it to pay off friends and family members, nor can you use it to prepay expenses: paying several months’ rent ahead of time, for example. Talk with an experienced attorney about what expenses can be protected if you use your tax return on them before you file for bankruptcy.

3. Use an exemption to cover your tax refund. Keep in mind that this may prevent you from using the exemption on something else, so choose your exemptions carefully. An experienced bankruptcy attorney can help answer questions about Pennsylvania exemptions and how they may impact your refund.

If you have recently filed for Chapter 7 bankruptcy or plan to file for Chapter 7 bankruptcy in the immediate future, and you’re ready to file your tax refund and want to keep as much of it as possible, consult with an experienced bankruptcy attorney to learn the laws and how they can impact you. Have questions about your bankruptcy, what assets qualify as exempt, or how to handle your tax refund when you’ve had to file for bankruptcy? Contact us today to learn more about how we can help.