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How Bankruptcy Affects Tax Returns

Vivona Pandurangi, PLC March 27, 2023

Partial View of Woman Filling in Bankruptcy FormBankruptcy is among the promising solutions to achieve debt relief when facing financial hardship. Depending on the bankruptcy chapter you're filing for, the trustee will use the net proceeds from the sale of nonexempt assets or your disposable income to offset your debts and pay your creditors. However, without seeking the necessary exemptions, your tax refunds may be considered part of your bankruptcy estate or disposable income. 

At Vivona Pandurangi, PLC, we pride ourselves on giving reliable advocacy and knowledgeable guidance to clients in the legal matters of bankruptcy. Our skilled Virginia bankruptcy attorneys are available to discuss your situation and determine whether you can keep your tax refunds in your bankruptcy case. We're proud to serve clients across Falls Church, Alexandria, Manassa, Arlington, and Fairfax County, Virginia. 

Is a Tax Refund an Asset? 

A tax refund can be described as a reimbursement made by the IRS to a taxpayer for any additional amount paid in federal or state taxes. If the federal or state government issues a tax refund to you, it will be considered an asset. Hence, when filing for bankruptcy, the tax refund will be part of your bankruptcy estate (Chapter 7) or disposable income (Chapter 13). 

Does Your Bankruptcy Trustee Keep Your Tax Refund?  

In most bankruptcy cases, the trustee might target your tax refund in order to pay your creditors. However, whether your bankruptcy trustee will keep your tax refund will depend on the following factors: 

  • When you received the tax refunds. 

  • Whether you have spent the money before filing for bankruptcy. 

  • The bankruptcy chapter you're filing for. 

  • Any available bankruptcy exemption used to protect the tax refund. 

Chapter 7 Bankruptcy 

Furthermore, if you file for Chapter 7 bankruptcy, any tax refund received in the year before filing will be part of your bankruptcy estate. Also, tax refunds received based on the income earned in the same year of your bankruptcy petition will be part of the bankruptcy estate. After the first year of Chapter 7 bankruptcy, you will be entitled to keep your full tax refunds. 

Chapter 13 Bankruptcy 

As mentioned earlier, your tax refund is part of the disposable income, and you must make it available for your Chapter 13 repayment plan. Hence, the trustee may keep your tax refund every year of your repayment plan. 

Your Options to Keep Your Tax Refund  

Here are some available strategies to help keep your tax refunds: 

Bankruptcy Exemptions 

Bankruptcy exemptions are statutes that protect your property from creditors in bankruptcy. Hence, you can use a bankruptcy exemption to protect the tax refunds you'll receive once you have filed your bankruptcy petition. 

Adjust Tax Withholdings 

Another way to keep your tax refunds is by adjusting your tax withholdings. This involves reducing your exemptions and only paying the taxes you owe. Adjusting your tax withholdings also ensure that you receive more money as your wages or income. However, ensure that you keep enough money to settle any tax you might owe. 

Spend on Necessary Items  

Also, if you receive your tax refund prior to filing for bankruptcy, you can simply spend it on necessary items such as rent, food, car payment, mortgage payment, medical care, or home repairs. However, do not spend your tax refund on luxury items. 

Get the Support of a Bankruptcy Attorney Today  

Filing for bankruptcy in Virginia often involves a lot of complex procedures. Depending on your unique situation, you may be able to keep or protect your tax refunds in your bankruptcy case or after filing. At Vivona Pandurangi, PLC, we have the diligence and expertise to advise and guide clients in complex bankruptcy matters involving tax returns. 

As your legal team, we can explore your options to keep your tax refund during and after bankruptcy. In addition, our attorney can help you create the right wording in your bankruptcy plan or pursue necessary exemptions to protect your tax refunds. Above all, we will work diligently to address your needs and concerns and help you keep most or all of your tax refunds. 

Contact us today at Vivona Pandurangi, PLC, today to arrange a simple consultation with an experienced bankruptcy lawyer. Our reliable legal team has the clear legal direction and advocacy you need to navigate crucial decisions in your bankruptcy filing. We're proud to serve clients across Falls Church, Alexandria, Manassa, Arlington, and Fairfax County, Virginia.