What Happens to Tax Refunds During Bankruptcy?
You may be able to keep some or all of your tax refund after filing for bankruptcy. However, the outcome depends on when the refund was earned, when you filed, which bankruptcy chapter you used, and whether an exemption protects it. South Carolina’s exemption rules can also affect how much of your refund can be protected.
If you’re wondering what will happen to your tax refunds during bankruptcy, consider reaching out to Reed Law Firm. Our bankruptcy attorneys in Columbia can review your refund and financial records before you file and help you understand how the money may be treated in your case.
Can a Tax Refund Become Part of a Chapter 7 Bankruptcy Estate?
Yes. A tax refund can become part of the bankruptcy estate if it represents an interest you had when the case began. 11 U.S.C. § 541(a) generally includes a debtor’s legal or equitable interests in property as of the bankruptcy filing. For example, if you file Chapter 7 in February and later receive a refund based on income earned during the previous tax year, the trustee may have a claim to some or all of that refund.
Can You Keep Your Tax Refund in a Chapter 7 Bankruptcy?
Possibly. The key question is whether an exemption protects your refund. Under S.C. Code § 15-41-30(A)(5), a debtor who doesn’t claim the homestead exemption may exempt up to a certain amount in qualifying cash and liquid assets, including refunds. Other exemptions may also apply depending on your circumstances. Your refund should be reviewed alongside the rest of the property you’re claiming as exempt, rather than assuming the entire refund is protected or unavailable.
What Happens to Your Tax Refund in Chapter 13?
In Chapter 13, you generally keep your property while making payments under a court-approved repayment plan. Your tax refund may affect how much you must pay through that plan, depending on your income, expenses, and the terms of the plan. Also, Chapter 13 plans generally must provide for the payment of projected disposable income to unsecured creditors. A tax refund may affect that calculation or the amount paid under a particular plan.
Does It Matter When You File Bankruptcy?
Yes. The timing of the filing can affect how your refund is treated. A refund connected to income earned before bankruptcy may become part of the estate. A bankruptcy filed during the tax year can create a more complicated calculation because some of that year’s income may have been earned before filing and some afterward. For instance, if you file bankruptcy late in the year, your eventual refund may relate partly to income earned before filing. The trustee may need to determine what portion belongs to the bankruptcy estate.
Can You Spend Your Refund Before Filing for Bankruptcy?
Don’t transfer or give away a refund to keep it out of your bankruptcy case. Unusual transactions before filing can raise questions about where the money went and why it was used. If you receive a refund and spend it before filing, keep records showing how you used the money. If you need to spend it on ordinary living expenses or another legitimate need, consider discussing the situation with our Columbia bankruptcy lawyers first.
What Should You Do If You Expect a Large Tax Refund?
If you’re considering bankruptcy, determine how much you expect to receive and which tax year the refund relates to. Keep your tax return, refund information, bank records, and records showing how you used the money. Then tell your bankruptcy lawyer about the expected refund before filing. Your lawyer can consider the timing, bankruptcy chapter, and South Carolina exemptions when determining how the refund may affect your case.
Know What Could Happen to Your Tax Refund by Talking to Our Columbia Bankruptcy Attorneys
Find out more about your case by getting in touch with Reed Law Firm. Our bankruptcy lawyers in Columbia can evaluate your expected refund, tax records, filing date, and available exemptions to help you understand what may happen to the money. Complete our online form or call 803-726-4888 for your confidential consultation.
