GUIs From Virginia (VA)

Saving Your Tax Refund Before Bankruptcy

Written by Helen White

Tax refund is something we all look forward to. It is good to know that the government owes you some money, after you have paid the taxes. These few extra dollars can be used for different things. But there are certain cases where you can loose the chance of getting tax refund assets and your credit after bankruptcy because of your creditor. But how is it possible when it is your money? In case of filing bankruptcy you can lose the tax refund to the trustee. A person always files for a bankruptcy when he doesn't have money to pay back all the bills and credits he has taken. After filing for bankruptcy, you get relieved from the tension of paying back the entire amount to your credits but you are not entitled to enjoy certain rights in this regard. Saving tax refund is one of them. There are chances of your bankruptcy trustee only keeping a certain portion of the tax return or the whole amount. It all depends on certain circumstances. In case you file for bankruptcy before 1st January, it can only take some portion of your tax return. But it also depends on circumstances like the state you live in and many other criteria. If you file for bankruptcy around the month of September, than the trustee can only take ¾ portion of your tax refund. This portion is called pro-rata part of your income tax.If you are filing for bankruptcy after January 1, the trustee gets all the right to take the full amount of your tax return. But this applies only if you are filing for bankruptcy between the start of a year and the time you get your refund. You will save a larger part of your tax refund by filing for bankruptcy after receiving the refund. In this way, your trustee can only take a little part of the total amount. Joint Filing Are you married and have filed a tax return along with your spouse? If you have filed for bankruptcy after marriage but only one of you has done this, the other will still get his share of tax refund. This is because you spouse in no way can suffer from the consequences of bankruptcy. Therefore, by declaring bankruptcy after you have jointly filed for tax returns will make you eligible to get at least half of the total amount. Spending the Tax Return Amount The bankruptcy trustee will usually not ask you to make payment; if you have spent the money you received from the tax refund before declaring bankruptcy. However, the way you spend money and on what you spend it will make a lot of difference. If the money is spent on paying back your debtor like any credit card payment, or it is returned to any family member or friend from whom you have borrowed money. In this case, the bankruptcy trustee will ask you to pay the entire amount you have received as tax return. But, if you did not repay any of your creditors and spent the money on fixing the roof of your house, repairing the car or some other work, the trustee will not be after your life to get the tax return amount. You can protect the tax refund by applying for an “exemption.” There are some states with stingy exemption rules. If your tax refund amount is more than $500, it is better to seek legal advice. If you are getting tax refund, it means you are giving an interest free loan to the government. When your tax refund amount is somewhere between the range of $4,000 to $5,000, the trustee can say that you are using this amount as savings and might object on the grounds that you have not revealed a “disposable income.” In many states, the bankruptcy laws say that the tax refund is a part of personal property. In this case, your trustee has full right to take the amount and pay back to your creditors, whereas in some states you can get exemptions to keep that fund with you. In some states, earned income tax credits and childcare credits are not regarded as personal property. They are counted as welfare benefits and creditors cannot take the cash. If you are preparing to file for bankruptcy, get information about tax refund and find out if you will be able to keep the money. Because of different states having different bankruptcy and tax refund laws, it becomes important for a person to know his rights before filing for bankruptcy. You can consult a bankruptcy lawyer or you can also study to know the best timing when the trustee would get only a little portion of the tax refund, as this is going to be beneficial for you.

 

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