Will I Lose My Tax Refund if I File for Bankruptcy?

With 2018 upon us, we’re within just a few weeks of being able to file our 2017 tax returns – which may mean a big tax refund! For many of my bankruptcy clients, tax refund season is an important time of year. It might mean purchasing that new vehicle they desperately need, or putting new tires on their car, or buying their kid a bed, etc.. For a lot of Coloradans living pay check to pay check, it’s just too difficult sometimes to save for these big-ticket items, and tax refund season may be the only time of year they can afford these necessities.

So what happens if you file bankruptcy while waiting for your tax refund? The short answer is that you may lose most or all of it, and that it makes more sense to speak first with a Denver bankruptcy lawyer about when to file and what to do if your refund if you decide to wait to file. This is because a tax refund is generally just money the U.S. or Colorado government owes you after you have paid too much in taxes during the year. If you are owed money when you file a chapter 7 bankruptcy you often lose your rights to the money, and it is instead collected by your chapter 7 trustee and paid to your creditors. There are some exceptions to this. For example, you get to keep 75% of any wages owed when you filed, and you can generally keep any personal injury awards.

When it comes to tax “refund” checks, you can keep any Earned Income Creditor or any “Additional Child Tax Credit” (NOT the child tax credit most of us parents get) you’ll receive. That’s because these are credits and not technically refunds, and because they are “exempted” – or protected from your trustee or creditors – under Colorado state law. But every other part of the tax refund owed to you the day you filed can be taken for your creditors, and will be taken if it allows your trustee to make a substantial payment on your debts in bankruptcy.

So does that mean you have to lose your tax refund if you file? NO! An experienced local bankruptcy attorney can give you valuable legal advice on how to protect your refund, or to protect as much as possible considering your circumstances. Or maybe it just makes more sense to file chapter 13, where – in Colorado at least! – you don’t turn over any money or property other than your monthly payments. A good lawyer can also guide you on proper spending before filing bankruptcy – aka “pre-bankruptcy planning” – so that you don’t wind up in hot water with the trustee, a creditor, or the bankruptcy court. There are many protections for debtors who use “non-exempt assets” before filing, but certain levels of spending, or other pre-filing transactions can muck up an otherwise clean and boring bankruptcy. And you almost always want a BORING bankruptcy.