Bankruptcy & Tax Refunds
Each year, many people receive substantial tax refunds. If they are facing a lot of debt, they must decide whether using the tax refund to pay creditors will help them out of debt. If a debtor has one major creditor and can negotiate a payoff with the tax refund, this may be a good option. However, when a debtor has multiple creditors and paying one will not ease the debt burden, bankruptcy may be a better option.
Some important factors when considering bankruptcy and tax refunds:
Tax refunds as assets in bankruptcy
Yearly tax refunds are “earned” at the end of the year for which the tax return is filed. Even if not received, because a debtor’s right to a refund is already earned, it is an asset in a bankruptcy case. Sometimes the refund will be exempt from creditor attachment. This applies to portions of tax refunds that are earned income tax credit or additional child tax credit. Some refunds are a low enough amount that they are exempt under miscellaneous exemptions.
Paid or Payable
Whether your refund is already paid or is still payable is also an important factor as to whether it is an asset that can be kept in bankruptcy. If the refund is attributable to mostly earned income credit and additional child tax credit, it is exempt if payable. If already paid, or if it is not mostly earned income credit or additional child tax credit, the best option if you are looking into bankruptcy is to properly spend it on necessities before filing.
Many times people borrow from family and close friends when they are financially strapped. It is natural to want to pay them back, perhaps with your tax refund. However, doing this will cause trouble for you and for your family member or close friend. When you file bankruptcy, you are required to list any payments to relatives within a year prior to bankruptcy. If the amount is significant, a bankruptcy trustee would have the right to take the money back from the relative or friend and share it with other creditors. The reason for this is that the bankruptcy code is set up so that all creditors are treated equally when a debtor is insolvent. Therefore, it is very important not to pay money back to relatives with your tax refund.
Call Moellring & Ambler at 217-214-3022 for a free consultation regarding bankruptcy options.