Will I Lose My Tax Refund if I File Bankruptcy in New York City?

When struggling to make ends meet your tax refund can make or break your personal finances.  Many of our clients in New York City want to know if they will be able to keep a tax return if they file bankruptcy.  The timing of your filing may be of particular concern if you have a big tax return coming, but whether or not you can keep the refund depends on several things.  In any bankruptcy case a tax refund is seen as an asset, and will need to be disclosed to the bankruptcy court accordingly- so you won’t be able to hide your refund, but that doesn’t mean the trustee can automatically take it.

If you receive your tax refund before you file for bankruptcy and then spend it all before you file, you should not have an issue.  If you file after receiving your refund it is highly unlikely a bankruptcy trustee will keep your case open for an entire year just to get your next year’s refund.  Because of this most of our clients wait until they receive their tax refunds before filing for Chapter 7.  They spend the refund on typical expenses, and use the last of the refund to pay for their bankruptcy case.  If you keep a paper trail the trustee won’t think your hiding cash or doing something inappropriate.  As long as you use the refund towards your normal monthly expenses or other reasonable purchases you have no issue.

On the other hand, if you file bankruptcy shortly before you receive your refund a trustee might look to include it in your bankruptcy estate and it’s true that trustees seem to look for more tax refunds closer to April.   However, even if you must file bankruptcy before receiving your tax refund, the refund can still be exempted with a Federal wildcard exemption in most Chapter 7 cases.

In contrast, and if you are filing for Chapter 13 in then keeping your refund will depend on the district in which you are filing your petition.  In the SDNY (Southern District New York) you may exempt up to $4,000 for each debtor in the first year of your Chapter 13 repayment plan.  You may only exempt $1,500 per debtor for each additional year of your Chapter 13 plan in this district.  If you file in the EDNY (Eastern District New York) the trustee will take your entire refund into the bankruptcy estate each year to go towards your Chapter 13 repayment plan.

Choosing to file either Chapter 7 or Chapter 13 bankruptcy in New York City is a big decision that should include many factors.  In a big picture keeping a tax return is just one small piece of a more complex financial puzzle.  Discharging vast amounts of credit cards, medical bills, and other personal loans could have a stronger impact on your financial future than keeping a tax return for example. If you think you need bankruptcy protection consult an attorney who can help you with the delicate timing of your bankruptcy so you can protect your much needed tax returns.

If you live in New York City and are in need of powerful debt relief contact the Law Offices of William Waldner online or at 212.244.2882 to arrange a free bankruptcy consultation.  Our firm only practices bankruptcy law.  Our clients know exactly what to expect before we file their case and we maintain a 99% Chapter 7 Bankruptcy discharge record as of 8/31/16.


This article is intended for educational purposes only.  By reading no attorney-client privilege has been created.