Tax Day is the federal individual tax filing and payment deadline, and it generally falls on or around April 15. This year, Tax Day is on Tuesday, April 18, 2023. This means that you’ll have to submit your individual tax returns and tax payments to the IRS on this date so you don’t get hit with penalty fees. 

Certain circumstances can make it more confusing to file your taxes, and bankruptcy is one of them. So what happens if you want to file bankruptcy in New York, but you could really use the tax refund? How will bankruptcy affect this? 

Below is more information regarding bankruptcy and your tax refund. 

Do You Get a Tax Refund in Chapter 7 Bankruptcy? 

When you file for Chapter 7 bankruptcy, your trustee liquidates your assets to pay your creditors. By law, you are allowed to keep a limited amount of property, possessions and income. But what happens when a tax refund is coming your way? Is this something you get to keep? 

If you are owed a large tax refund, it’s going to be an easy target for the trustee. Unlike other assets that need to be sold, a tax refund is a simple check. Therefore, bankruptcy trustees have their eyes on this money, as it can be used to pay your creditors. 

On the day your case is filed, any assets that you owe become a part of your bankruptcy estate. Your tax refund is a part of this. If you want to protect your tax refund, you’ll need to spend it prior to filing bankruptcy. Your refund can go toward a number of essential expenses such as: 

  • Rent
  • Mortgage payments
  • HOA dues
  • Food
  • Utilities 
  • Educational expenses 
  • Medical expenses 
  • Insurance
  • Home maintenance 
  • Car repairs and maintenance

By the time you are done paying for these expenses, you shouldn’t have much left from your tax return. Do NOT use your tax refund to pay for luxury items, monthly expenses in advance or debt owed to a friend or family member. If you do, this can trigger a rejection from the trustee.

How About in Chapter 13 Bankruptcy? 

Chapter 13 bankruptcy is a repayment plan where you agree to pay your creditors back slowly over time. Most people prefer to file Chapter 7 bankruptcy, but some do not qualify. In this case, they can file Chapter 13 bankruptcy. 

Usually, you must turn over your tax refund to the trustee in Chapter 13. This is because your creditors are entitled to receive all of your disposable income. However, the final decision depends on your plan and the amount you are paying your creditors. You might be able to protect your tax refund if you:

  • Qualify to excuse a tax refund turnover
  • Pay at least 70 percent of unsecured debts
  • Pay all unsecured debts through a 100 percent plan 
  • Have a plan that allows you to keep refunds 

You can also ask the court to excuse your responsibility by filing a Chapter 13 plan modification. In this modification, you’ll need to detail the refund you’d like to keep, the refund amount and the financial hardship you are facing. 

What if I Forget to Protect My Tax Refund in Bankruptcy? 

If you forget to protect your tax refund, there’s a good chance that your trustee will take it. But there are a couple steps you can take to stop this from happening. 

Adjust your tax withholding 

Lowering your exemptions and only paying the tax you owe can be a good strategy. You’ll get less at tax time, which means there’s less for the trustee to take, and your paychecks will be bigger. Just be sure to withhold enough to cover the taxes you might owe. 

Use a bankruptcy exemption 

You might also be able to protect your tax refund by using a bankruptcy exemption. When you file for bankruptcy, your assets become a part of your bankruptcy estate. But you are able to keep the property that New York decides you need to work and live. If you can’t use a tax credit exemption, you might be able to use a wildcard exemption. 

At The Law Office of William Waldner, we understand that tax refunds can be an important part of your income. We are here to help you protect your refund while filing for bankruptcy. Since your initial appointment with a bankruptcy lawyer in New York may be several months before you actually file, we want you to plan accordingly. Set up a consultation today and let’s talk!