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While In Bankruptcy, Can You Lose Your Tax Refund?

The short answer, is it depends.  Like most things while in Bankruptcy the way they are addressed can help you retain your refund. First everyone must recognize that no one Bankruptcy case is the same and every case can vary depending on your own personal financial situation.

Some of the variables can be:

  1. What years do you owe the IRS for and were the returns filed timely?
  2. How much do you owe the IRS?
  3. What is your current household income?
  4. Do you have any additional expenses outside of the Bankruptcy case?

All of these factors come into play when you’re discussing keeping your tax refund.

When asking yourself if my refund will be taken by the IRS remember it’s all about timing. Your case can be filed and if months down the road you are owed a refund the IRS can offset your refund and turnaround and adjust the amounts they claimed are owed in your case. That’s why it is so important to have a firm understanding of how much is owed to the IRS and for what years. You want to make sure that all previous years returns are filed and the amounts claimed in your case are correct.

If by chance the Trustee assigned to your case shows interest in your refund depending on your current income there are ways to still keep your refund. Chapter 13 Bankruptcy is a five-year process and during this time most people will have daily expenses that were never accounted for in their case. Examples of this could be needing to install a new fence on your home, large vehicle repairs, school expenses for yourself or child and most people have some kind of medical expenses incurred over a five-year period.

Most of our clients are able to retain their tax refund based on a showing that they have reasonable expenses that they intend to use the refund to cover.  The key is to get with your attorney as soon as you file your tax return showing you will receive a refund.