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Bankruptcy & Tax Refunds

Taxes are due April 15, which means you still have time to file and claim your tax refund. If you’re like a lot of Californians, you count on your tax refund to pump money back into your life for saving, investing, or affording necessary expenses.

If you declared bankruptcy during the past tax year or intend to do so in the near future, though, you’re probably wondering how these could impact your tax refund. You may be able to protect your tax refund from your creditors under the right circumstances, but there’s no guarantee of protection in any given situation.

Claiming Your Tax Refund as a Chapter 7 Exemption

If keeping your tax refund is important to you, one way to do it is to leverage the exemptions available to you in Chapter 7 bankruptcy.

California provides two sets of exemptions: the 703 Exemption Series and the 704 Exemption Series. Between these two, the 703 Exemption Series is a better tool for protecting something like your tax refund. This is because the 703 Series has a “wildcard” (also called “grubstake”) exemption category that can account for any asset not covered by another exemption category (such as your tax refund) up to $1,550.

That might not sound like a lot, but you can increase this exemption amount by applying any unused portion of your homestead exemption toward your wildcard exemption, up to a total of $30,825.

Can I Keep My Tax Refund with the 704 Exemption Series?

If you own equity in your home, you’ll probably want to choose the 704 Exemption Series because it provides a larger homestead exemption. It doesn’t, however, have a wildcard exemption category or another category you could use to protect your tax refund.

Despite this, you may be able to keep your tax refund and benefit from the 704 Exemption Series. This can be possible when you file for Chapter 7 after your tax refund reaches your bank account, protecting it from falling into an open bankruptcy estate.

You May Lose Your Tax Refund in Chapter 13

If you file for Chapter 13 bankruptcy, you are very likely to lose your tax refund. While there is some sophistication to this process, the bottom line is that Chapter 13 Bankruptcy results in a repayment plan that you must follow.

Your repayment plan may require you to pay your creditors back with any disposable income you receive during the three to five years your plan is in effect. Your tax refund may be deemed disposable income, and you may be required to use it to pay off your debt.

This is the most likely scenario, but it’s not impossible to protect your tax refund in Chapter 13. If you design a repayment plan that exempts your tax return, and your creditors approve this plan, you can protect your tax refund from seizure. Coming up with such a plan, however, would require legal counsel from an experienced tax attorney who could help you weigh all of your available options.

Do You Need Help with Bankruptcy?

At Nguyen Law Group, we see a lot of clients around this time of year who have questions about how bankruptcy will affect their taxes. If you require legal assistance with bankruptcy during tax season, our attorney can provide the experienced counsel you need to make the right decisions for you.

Learn more about how Nguyen Law Group can help by contacting us online. When you do, be sure to ask about a free initial consultation.