Can I Use My Tax Refund to File Bankruptcy?

Filing Bankruptcy With Tax Returns


Like so many other questions, the answer is “It Depends.”  A tax refund is simply a debtor’s property held by the IRS.  If you receive the refund before you file bankruptcy you can certainly pay other bills or purchase needed items with that money, with some restrictions.  These are the same restrictions that apply to any bankruptcy.  For example, if more than $600.00 is paid on a past due bill to any one creditor within 90 days of filing the Trustee may ask for that money to be paid back into the estate.

Is My Tax Refund Exempt

Paying your attorney for legal services is not however, paying on a past due bill, so there is no issue of paying it back. In many cases, the refund itself will be exempt. For example, if Federal exemptions can be used (as in the State of Washington) up to $12,000.00 in unused homestead exemption can be applied to other property.  State exemption statutes may also provide protection for your tax refund.  Since tax refunds represent earned income, in many states income exempt from garnishment may also be exempt in bankruptcy.

Generally speaking, if a debtor is eligible for a Chapter 7 bankruptcy, has little or no non-exempt property and has income below the state average, a modest refund received before or after filing will probably not be of interest to a trustee. If a debtor is filing a Chapter 13 wage earner plan and will make monthly payments on consolidated debt, the Chapter 13 Trustee or a creditor may ask the court for the refund to be included in the plan.

Best Advice

The best advice is to wait until after the refund is received to file for bankruptcy if the money can be used for something other than paying past due debt. The money may be used to buy exempt household goods or a used car or to fund an IRA because such property has its own exemption. There is also no prohibition against using the refund to pay for the legal services and court costs required to file bankruptcy.

A debtor must be careful however, if getting an advance on a tax refund from a bank or tax preparer.  If a debtor uses that money to file bankruptcy, the obligation to pay the money back may be canceled.  Such actions may very well be fraudulent as to that creditor and may result in the full debt being non-dischargeable while the refund may be used to pay other creditors.

Get More Information

Contact Steven Schneider at: (509) 838-4458 to discuss your particular bankruptcy situation.  He can give you an overview of solutions and costs and help you with a little peace of mind.

Leave a Reply

Your email address will not be published. Required fields are marked *