Bankruptcy Lawyers
South Carolina


Will Chapter 7 Bankruptcy Affect My Tax Refund?

Debt collection and tax season concept with deadline calendar, reminder note, coins, and calculator on table.

If you're considering bankruptcy during tax season, here's what you need to know.

Chapter 7 bankruptcy is also called "liquidation bankruptcy" because, at least in theory, your assets can be liquidated (sold) and used to repay your creditors before the rest of your debt is discharged (eliminated). During tax season, one asset you might be concerned about losing is your state or federal tax refund.

Under some circumstances, your tax refund may be considered an asset that can be liquidated in Chapter 7 bankruptcy. However, there are several techniques you can use to protect your tax refund and improve your financial situation. To find out how filing Chapter 7 could affect your tax refund, contact an experienced bankruptcy attorney today.

Is a tax refund an asset you can lose in bankruptcy?

Whether a tax refund can be liquidated in Chapter 7 bankruptcy depends in large part on when you receive the refund and when you file for bankruptcy:

  • If you have already received your refund and the IRS doesn't owe you anything further, then there is nothing special that happens to the refund itself. However, if your refund is still money in the bank, that's an asset that you need to account for in bankruptcy, just like anything else.
  • If the IRS owes you a refund and hasn't paid it yet, then you need to inform the bankruptcy trustee that you have a refund pending. That refund is considered an asset that could be liquidated in Chapter 7.

It's also important to note that any tax refund based on income you earned after filing for Chapter 7 bankruptcy is yours to keep. The bankruptcy trustee only has the right to refunds you earned before you filed.

Ways to protect your tax refund in Chapter 7 bankruptcy

While, again, Chapter 7 is known as "liquidation bankruptcy," the vast majority of Chapter 7 filers don't actually have to liquidate anything. There are several techniques you can use to protect your assets, and tax refunds are no exception. Here are a few ways to avoid having your tax refund liquidated in bankruptcy:

  1. Adjust your withholding so you don't get a refund in the first place. If you have time to plan ahead, this is one way to sidestep the issue. Just make sure you're still withholding enough so you won't owe taxes at the end of the year; remember, you can't discharge tax debt in bankruptcy unless it's at least three years old.
  2. Spend your tax refund on necessities. If you spend your tax refund on necessary purchases, then it can't be seized in bankruptcy. Examples of necessities include housing, food, utilities, and medical expenses. But make sure your purchases are truly necessary and timely; pre-paying your monthly rent by several months, for instance, isn't something you currently need, so the bankruptcy trustee may see it as bad faith.
  3. Protect your tax refund using bankruptcy exemptions. In South Carolina, you can use the "wildcard" exemption to protect up to $6,700 in assets. This can be used to protect your tax refund if you don't need it to protect anything else.

Talk to an experienced attorney to secure your financial future

In short, if you are concerned about losing your tax refund in Chapter 7 bankruptcy, that's one more reason to get experienced legal counsel. There is no one-size-fits-all answer to this question. Rather, your attorney will look at your financial situation holistically and explain how to protect your best interests throughout the bankruptcy process.

If you are considering a financial reset, you've come to the right place. Give us a call or contact us online to schedule your free consultation with a bankruptcy lawyer at Benjamin R. Matthews & Associates, LLC.

Categories: Posts

2010 Gadsden Street
Columbia, SC 29201

Phone (803) 799-1700
Fax (803) 728-6718

331 E. Main St, Suite 257
Rock Hill, SC 29730

Phone (803) 909-9377
Fax (803) 728-6718