One question clients often ask is whether filing a bankruptcy will cause them to lose their future income tax refund. When a person files bankruptcy, anything they own or are entitled to on the date they file bankruptcy is considered an asset of their bankruptcy estate.
The tax refund amount the bankruptcy estate is entitled to is calculated on a pro-rata basis (according to the number of days in a year) and based on the date the case is filed.
There are exemptions that can be used to protect some (or hopefully all) of these assets, including income tax refunds.
Tax Refunds for Chapter 7 Cases
- In Kansas, under K.S.A. 60-2315, any portion of a debtor’s tax refund that is attributable to the earned income tax credit is exempt.B This exemption is only able to be applied towards one year’s tax refund. The remaining tax refund cannot be exempted and would need to be turned over to the Chapter 7 Trustee for disbursement to creditors.
- In Missouri, there is not an earned income tax credit, but under RSMo 513.430.1(3), there is a wildcard exemption in the amount of $600.00 per debtor that can be applied anywhere the debtor needs property exempted. Additionally, if a debtor is head of household, under RSMo 513.440, an additional $1,250.00 exemption can be applied where needed, along with an extra $350.00 per child under the age of 21. Any remaining tax refund not protected by these assets would need to be turned over to the Chapter 7 Trustee to be disbursed to creditors.
Tax Refunds for Chapter 13 Cases
- In addition to the exemptions outlined above, in a Chapter 13 there are other ways to work around allowing a debtor to keep the refund.B One option is to average out the tax refund on a monthly basis and include that monthly amount as income on the debtor’s budget. Another option is to file a motion with the Court requesting permission to keep the tax refund. When requesting permission to keep the tax refund, the purpose for that refund must be something above and beyond ordinary budgeted-for expenses. Some good examples of these types of expenses would be major automobile repairs, roof repairs, out-of-the-ordinary medical expenses and the like.
Sometimes, if there is nothing urgent in nature forcing a person to file a bankruptcy immediately, it might be worth waiting to file a case so that the tax refund can be received and spent on reasonable and necessary items prior to filing. Additionally, one way to avoid having the Trustee take a tax refund is by adjusting employer withholdings so that any refund that might be received is minimal and not worth pursuing by the Trustee. Contact a Sader Law Firm attorney today to further discuss your options for Chapter 7 or Chapter 13 Bankruptcy.