How Does my Tax Refund Impact my Bankruptcy?

by Jesse Langford

As the calendar creeps closer to the new year our office gets more and more questions regarding how a tax refund works in a bankruptcy. The bankruptcy code requires that debtors in a bankruptcy list “assets and liabilities” as of the date the bankruptcy case is filed. A future tax refund qualifies as an asset of the bankruptcy estate because a tax refund is earned throughout the year that a debtor pays taxes, even though you are not refunded that money until your tax return is filed the following year. A brief example offers the best explanation:

Jesse files a Chapter 7 bankruptcy on October 21st, 2016. October 21st is the 295th day of the calendar year out of 365 days. As of the filing date of his bankruptcy, Jesse has earned 81% of his tax refund for 2016. (295 ÷ 365 = 81%) When Jesse files his tax return in February, 2017 he is to receive a combined refund of $2,500.00 from his Federal and State tax return. Since 81% of his tax refund had been earned as of the filing date of his bankruptcy, $2,025 of Jesse’s tax refund is an asset in his bankruptcy.

While the above example may seem unfair that you could potentially have to surrender money long after your case has been filed, it is important for clients to remember that you may exempt a certain portion of your assets from being surrendered to the bankruptcy trustee. Any portion of a tax refund that is provided by an earned income credit or child tax credit has been deemed to be fully exempt from being surrendered in a Missouri bankruptcy. There may be other options you have to protect your tax refund with other exemptions or strategic bankruptcy planning and you should consult a reputable bankruptcy attorney to advise you of the best way to protect all of your assets.

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