Whether a tax refund will be taken by the Trustee in a Chapter 7 bankruptcy will depend on several factors.

As a general rule, the amount of taxes withheld from your pay are prorated over the entire year.  This means that the portion of the tax refund for the time before the bankruptcy filing is property of your bankruptcy estate and is available to be used to pay your unsecured creditors.

As an example, if you filed a bankruptcy petition on December 1, the withholding from January through November is part of the bankruptcy estate.

At the 341 Creditors Meeting, the Trustee will usually advise the Debtor as to whether or not he will administer the tax refund.  This decision will be based on a review of the tax return(s) provided to the Trustee.

For a tax refund to be worthy of administration, the Trustee will consider several factors:

• The amount of the refund.  Often if a refund is small, the Trustee will not take it simply because it is not cost effective to distribute it to the unsecured creditors.
• Exemptions.  Depending upon the state in which you live, the funds may be exempt under federal exemptions, state exemptions which permit a cash exemption or a wild card exemption, or an earned income tax credit exemption.  In Louisiana, where I practice, we have a specific earned income credit exemption.
• Prior year(s) unpaid taxes.   Taxes are normally a priority debt.  If the refund is going to pay past due taxes, then the trustee will not take it since the priority debt must be paid before an unsecured debt is paid.

When possible, the easiest way to avoid having to give up a tax refund is to file the return, receive the money and spend it before the bankruptcy is filed.  Paying for things such as pre-filing legal fees as well as the day to day necessities of life are permissible uses of a tax refund.

The receipt of a refund is only one issue in determining when to file a bankruptcy.  Other issues like a pending foreclosure, repossession, or the expected receipt of a bonus can all affect the timing.  Also, local practice in the court where you file will be a factor.

Similar Posts:

• Keep Your Tax Refunds in Massachusetts Bankruptcies
• Bankruptcy And Debt Settlement Payments
• Can You Eliminate a Tax Lien in Bankruptcy?
• Exemptions In Bankruptcy
• The Debts That Can Be Discharged Through Chapter 7 Bankruptcy