Tax refunds are vulnerable in bankruptcy. In fact, tax refunds are one of the most routinely seized assets by the trustee. However, with some planning, we should be able to save your tax refund.
The best approach is to receive your tax refund before filing for bankruptcy. When you receive your refund, spend it on ordinary living expenses like groceries, rent, mortgage, utility bills, and transportation costs. You will need to keep a detailed record of how the refund was spent.
The key is to spend the refund on ordinary living expenses. There is somewhat of a grey area here so always consult with your attorney before using your tax refund. There are a few things you should definitely avoid. Never use your tax refund to pay back a friend, family member, or business partner. Because you have a close relationship to these individuals, they are considered “insiders” under the bankruptcy laws and the trustee has the ability to seize that money to pay other creditors. You should also never pay a collection agency with your refund. If you are filing for bankruptcy, the debt that the collection agency is calling about will most likely be discharged. You would be throwing your money away if you paid a collection agency.
If you are forced to file bankruptcy before you recieve your tax refund, you will need to work with your attorney to maximize the exemption laws to attempt to save your tax refund. In Texas, you have the option to use the federal exemptions or the Texas exemptions. You and your attorney will analyze all your assets (including your tax refund) and decide whether the federal or Texas exemption laws maximize the amount of assets you will be able to keep.
The key thing to understand is that your tax refund is an asset that must be addressed when you are filing for bankruptcy. Make sure to discuss your tax refund with your attorney.
Please give our Dallas Bankruptcy Attorneys a call if you have any questions about bankruptcy at 214-236-2712.