By Cara O'Neill, Esq.
How It Happens
Often times, a bankruptcy petitioner files his tax return before filing for bankruptcy, and given the financial disclosures required, it makes sense to do so. Problems arise, however, when the petitioner forgets about the refund and files bankruptcy before receiving it. Forgetting to include it on the bankruptcy petition is a problem because a tax return received after the filing of the petition is an asset of the bankruptcy estate. If the petitioner already took the maximum exemptions, then the tax refund is not exempt and the petitioner will not be able to retain it.
The Problems Created
This is especially unfortunate when the refund is spent before the Meeting of Creditors. Without the funds, the bankruptcy petitioner may be forced to do one of two things: 1) come out-of-pocket and give the bankruptcy trustee the cash value of the refund, or 2) amend the petition to claim the tax refund as exempt property but relinquish other property instead. Of course, no one wants either of these things to happen.
How to Prevent Losing Your Tax Refund
Many people want to start off the New Year by getting a fresh start through bankruptcy. As with everything in bankruptcy, knowledgeable planning is the key to avoiding financially devastating issues. If you expect a tax refund, it may be wise to delay filing bankruptcy until after you receive the refund. If you use it for necessary living expenses before filing, you shouldn’t run into problems with the bankruptcy trustee – just make sure to properly document its use. As always stressed, transparency before and when filing bankruptcy will keep you out of trouble you don’t want to be in.
If you must file before you receive your refund, the tax refund should be properly exempted on your bankruptcy petition. While you may not be able to keep all assets you would like, doing so will prevent the unpleasant surprise of finding out that you owe thousands of dollars.
Tags: bankruptcy tax refund, 341 meeting of creditors, things to watch for in bankruptcy, filing bankruptcy