Don’t Lose A Tax Refund In Bankruptcy
In Wyoming, any cash, bank deposits or right to receive money in the future that a debtor owns on the day he files for chapter 7 bankruptcy is an asset that the bankruptcy trustee can take away. If a debtor files for bankruptcy in January 2017, for example, the trustee will likely seize all of the debtor’s 2016 tax refund. The reason is that the IRS owes the money to the debtor, and that right to receive money is something that the trustee can seize.
By contrast, if you file your tax return early, get a refund and then spend it before you file for bankruptcy, the trustee can no longer take it away because it is gone. Be careful, however, not to spend a tax refund on non-exempt things that the trustee can take away from you. For example, if a debtor uses his tax refund to pay back his sister the $2,000 she loaned him, the trustee will take the money away from the sister. Eligible expenses include regular household expenses (mortgage, rent, food, clothing, utilities, but not past due rent) and regular car payments.
A tax refund received before filing may also be used to pay legal fees for filing bankruptcy.
In Wyoming, the portion of the tax refund that a trustee can take is prorated by the date of filing. For example, if a debtor files for bankruptcy on June 30, the trustee will likely take half of the debtor’s tax refund that the debtor would otherwise receive the following Spring. A debtor can minimize that impact by adjusting her W-4 exemptions so that the future refund will be lower.
© 2017 Clark Stith
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