How do I prevent bankruptcy from swallowing my tax return? | Reed Law Firm, P.A.

How do I prevent bankruptcy from swallowing my tax return?

On Behalf of | Jan 31, 2020 | Bankruptcy |

The new year means another new tax season. Many Americans rely on a refund to help them pay bills and cover living expenses. If you are in bankruptcy or considering debt relief, there are ways to shield your tax refund from creditors and use that money to help regain firm financial footing.

Almost 96 million people received a tax return in 2019 - nearly three-quarters of all filers. Those 2020 refund checks should start tumbling in soon. Timing is everything in bankruptcy, especially when you have received or are expecting to receive a refund check. Tax returns are assets subject to liquidation unless you claim it as exempt property.

Personal property exception

Most people looking for a fresh start file Chapter 7 or 13 bankruptcy to help pay off debts. But filing for bankruptcy doesn't necessarily mean losing everything. Certain exemptions may allow you to hold onto important assets, like your home and vehicle.

In South Carolina, you also can keep your tax return under the so-called wildcard exemption for up to $5,000. But that does not mean you can buy anything you want with your refund. The IRS can still seize your refund to settle unpaid taxes. Trustees may scrutinize your spending for luxury items such as new cars, exotic vacations, lavish decorating or fancy clothes. Acceptable expenses include:

  • Mortgages and rent
  • Car payments and maintenance
  • Utilities and home repairs
  • Food and clothing
  • Health care
  • Tuition

You might want to minimize withholdings from your paycheck to reduce your tax return. That might help keep trustees from trying to seize your refund. You also might consider paying down your mortgage or car loans with your refund before filing bankruptcy.

Relief is available

Bankruptcy offers you a second chance to climb out of debt and rebuild your finances. The process is complex and can feel overwhelming. But it does not have to be so daunting. Most financial crises are temporary.

Every bankruptcy is unique, just like everyone's tax liability. You might be counting on that refund to buy a needed appliance or pay your child's college tuition. It is important to know how to protect your tax return as part of a recovery plan that can rebuild your credit, your confidence and your lifestyle.


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