If you are thinking of filing bankruptcy, it is important to know that your timing could have an impact. That is one of the reasons we recommend talking to a bankruptcy attorney before deciding when to file. Keep reading to learn how your timing could affect your tax return and then contact The Law Offices of Paul Y. Lee at 888-748-0025 for a free consultation.
Chapter 7 Bankruptcy and Tax Refunds
When a person files Chapter 7 bankruptcy, timing is very important. As far as tax refunds go, depending on the timing, you could keep the whole amount or lose it entirely. Which of those is true will depend on a number of things, including when your bankruptcy is filed. Remember that Chapter 7 bankruptcy involves a trustee taking control of your bankruptcy estate to sell it and distribute it to your creditors.
If your tax return is received before you file for bankruptcy, then it will be part of the bankruptcy estate and can only be used to pay for allowable expenses such as your mortgage or utilities. If you spend it on anything the court considers a “luxury item,” then you could be required to return the funds.
On the other hand, if you file before you receive your tax refund, then when you earned the income is the determining factor. If it was for money that was earned pre-bankruptcy, then it will be part of the bankruptcy estate. However, if the tax return covers money received after you filed, then it belongs to you, and the trustee cannot legally take it.
Chapter 13 Bankruptcy and Tax Refunds
A Chapter 13 bankruptcy is very different in that it is a reorganization of your debt. It lasts for years, which means you will likely have several tax refunds during the time it is in play. Your bankruptcy plan would include all household income – which would include tax refunds. If your income is steady and your tax return can be easily estimated, then it is likely to be factored directly into your monthly income and expenses, while if it is changes dramatically from year to year, then we will need to plan accordingly.
Call Today with Additional Questions
If you have questions about the timing of filing for bankruptcy, or other issues related to California bankruptcy, we recommend contacting The Law Offices of Paul Y. Lee at 888-748-0025 for a free legal consultation. We are happy to assess your situation to determine if bankruptcy is a reasonable solution for you.