Anne-Marie L. Bowen, P.A.

Can I Keep My Tax Refund in Chapter 7 Bankruptcy?

It depends... If you have filed Chapter 7 Bankruptcy or plan to file Chapter 7, NO, unless one of the following applies: you have Earned Income Credit, you have exemptions available to claim, or if you already got and spent the tax refund before filing Bankruptcy.  

Here's a little more detail.

(1) Earned Income Credit: If your tax refund is for Earned Income Credit, then the Chapter 7 Trustee will not take it.  EIC is designated on the 1040 Tax Return and is usually awarded to low income people with children.

(2) Exemptions: If you have exemptions available to claim all or part of your refund, you can keep the exempt portion.  An "exemption" is a law that says you get to keep certain property and your creditors can't take the property from you. For example, in Florida, we have $1,000 personal property exemption. If you only own $700 worth of property and your tax refund is $200, you could claim it as exempt. Or, if you do not own a home, we have a Wild Card Exemption which is a statute that lets you exempt $4,000 worth of personal property. So, you could shield and keep potentially up to $4,000 of a tax refund, depending on your other assets.

(3) Received & Spent: If you have already received your tax refund this year and spent it before filing your Bankruptcy petition, then a Trustee can't take away from you what you don't have. Just be sure not to spend the refund to repay loans to friends and/or family which is a "no-no" in Bankruptcy court.

You can always pay your attorney's fees with a tax refund!

Bottom line: talk to an attorney about keeping your tax refund before you spend it!

In my next blog post, I'll discuss tax refunds in Chapter 13 Bankruptcies.

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