How does bankruptcy impact my tax refunds?
To answer this question, we first need to identify which chapter of bankruptcy you have filed or are planning to file. There are several chapters, but the primary consumer chapters are known as a Chapter 7 Bankruptcy or a Chapter 13 Bankruptcy.
Chapter 7 Bankruptcy:
In a Chapter 7 Bankruptcy, the timing of the tax refund is important. Bankruptcy allows most people to keep all of their property. This is accomplished by using state or federal exemptions. The State of Texas allows individuals to choose between state exemptions or federal exemptions. The exemptions you choose is going to be based on your actual assets. Most people will want to use federal exemptions because this allows for what is known as the “wildcard” exemption. This exemption allows you to protect anything you wish. If you are an individual filing bankruptcy, you can protect up to $11,500.00 of cash, a tax refund, etc. It doesn’t matter what the property is, the value is all that matters. So if you are receiving a large tax refund that is, lets say $8,000, you could use federal exemptions to protect that money. If you are filing a joint case (married couple), then you can exempt up to $23,000.00.
Chapter 13 Bankruptcy:
The tax refund policy in a chapter 13 bankruptcy is a little more complicated. In a Chapter 13, you are in bankruptcy for 3 to 5 years,as opposed to a Chapter 7 where you are in bankruptcy for 4 to 6 months. Therefore, you have to consider not only your current tax refund, but also the tax refunds you are going to receive over the next 3 to 5 years.
Now, in Dallas/Fort Worth, the judges have adopted a singular policy in regards to tax refunds. This policy allows an individual to keep up to $2,000 no questions asked. Anything above that amount is to be turned over to the Trustee. However, you can always file a response and request that you be allowed to keep 100% of your tax refund. If you can show the court and trustee that the refund is needed for necessary expenses, such as unexpected medical costs, vehicle repairs, home repairs, etc. Then you are likely to be able to use 100% of the refund.
The kicker is you have to do this each and every year. If your refund is less than $2,000, then you have nothing to worry about. However, anytime it’s consistently going to be above $2,000 then you need to be aware of this policy.
Remember, if you really need the money for necessary expenses, you are very likely to prevail. If you need the money to go to Hawaii, then that is another story.