When you file for bankruptcy, you typically have to give up any luxury assets as part of the process. While you can keep your home, car or truck, and retirement accounts, some other things become part of the bankruptcy estate under Chapter 7 filing rules. In Minnesota, people without a lot of equity in a house, and renters, get to keep their tax refunds. People with lots of equity in their houses lose a portion of the tax refund for one year. A good lawyer will work with you to minimize the loss of tax refunds in bankruptcy.
When You Do (And Don’t) Get To Keep Your Refund
In the fight over whether or not you get to keep your tax refund during Chapter 7 filings, a lot of it is going to comes down to your timing. Because if your refund it based on income you earned the year before you filed, then it will be lumped in with all the other cash you earned during that time, and go to the estate. The same is true, by and large, or refunds for your taxes the year during which you filed for bankruptcy. The tax refund you receive the year after filing for bankruptcy, though, is yours to keep the same way that any other income you earn would be, according to Nolo.
While that sounds fairly cut and dry, it’s also worth noting that in many states you can attempt to use an exemption to protect your tax refund from being added to the bankruptcy estate. This will require filing an exemption for the refund (which may not be allowed depending on your state and how much cash it allows you to keep on-hand while you’re filing for bankruptcy), and in some cases it may require the use of what’s called a wildcard exemption. In Minnesota, people without a house to protect, always have a wildcard exemption which should be used to protect the tax refund.
What Can You Do If You’re Worried About Your Refund
If you know you’re going to have to declare Chapter 7 in the near future, but you’re worried about your refund, there are some things you can do to help protect that money. The first is that you need to adjust your tax withholding so that you’re only paying the taxes you owe, and getting more money back in your check. This helps ensure that you have as much money coming to you as possible, but you will still need to set aside money to pay your taxes when the time comes.
Also, if you haven’t yet filed for bankruptcy, but you have your tax return, then you need to be careful with how you spend it. Because if you don’t spend that windfall on necessities, or if you try to pay back your creditors in an imbalanced way, that could affect how your filing is perceived, or even whether or not it gets approved. On the other hand, if you spend your last tax return on necessities like food, utility bills, your mortgage payment, or something similar, then that probably won’t affect your Chapter 7 filing in the slightest.
Filing for bankruptcy is a complicated process, and for those who don’t have any experience with it the requirements can seem rigid and frightening. That’s why if you’re going to file for bankruptcy, you should make sure to contact an expert who can walk you through the process, help you file your documents, and make sure your voice is heard throughout the process. If that is the kind of helping hand you need, then all you have to do is contact us today!