Debtors who are looking to file Bankruptcy often have questions on whether or not their anticipated Tax Refunds can be protected or if they will be seized by the trustee. The answer to that question depends on a few circumstances.
Chapter 13
All disposable income (any income not used for reasonable and necessary expenses) is required to be paid into your Chapter 13 payment plan. And you guessed it, large tax returns are considered disposable income by the court. The local chapter 13 trustees generally like your Tax Refund to be less than $2,000. There are a few ways to protect your refund. If you received your tax refund prior to filing, it is considered the same as cash in the bank. If you regularly receive large tax refunds, it might be wise to adjust your tax withholdings in order to better afford your monthly chapter 13 bankruptcy payment.
Chapter 7
Like Chapter 13, any refunds received prior to filing a Chapter 7 can be treated as cash in the bank and protected using exemptions. A tax refund that has not yet been received also needs to be exempted. If you’ve already exhausted your exemptions, then you can spend it on necessary expenses, such as food, clothing, medical care, necessary repairs on your home or cars. Depending on how far in advance you’re able to plan, you can also simply adjust your withholding to minimize your refund. Please be mindful that the government will take your refund to satisfy any tax debt from previous tax years.
Having successfully helped well over a thousand clients navigate Chapter 7 and 13 bankruptcy, we would be happy to help anyone looking into bankruptcy. Feel free to contact your Yuba City bankruptcy attorney to schedule your free consultation at 530-797-4402.
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