Bankruptcy is a federal process by which you may request that a court take over the management of your debts if those debts grow too high for you to reasonably pay. The bankruptcy court will take all of your income and assets into consideration when deciding how much you can afford to repay to your creditors. Unfortunately, this includes any impending tax refunds. Although the bankruptcy process is federal, it is governed by state laws. Depending on the laws in your state, you may be able to avoid handing over all or some of your tax refund during a bankruptcy.
File your taxes and spend your tax refund before filing for bankruptcy. As long as your tax refund is spent on household necessities, the bankruptcy court will not demand that you contribute the money you received to your creditors.
Find out the tax exemptions for your state on each type of personal bankruptcy. The amount of your tax return that will be considered exempt varies depending on the type of bankruptcy you file. Filing the right type of bankruptcy depends on eligibility, but can save a larger portion of your tax refund.
Consider your income exemptions. Although income exemptions do not directly apply to your tax refund, you may apply with the court to exempt any refund you receive on income that is considered exempt in your state. This includes taxes you pay on retirement funds or unemployment benefits.
File bankruptcy individually if you are married and plan to file a joint return with your spouse. Because income belonging to your spouse is not included if you file bankruptcy individually, half of the amount you receive in your tax refund is legally hers. The amount delegated to your spouse is untouchable by the bankruptcy court.
Use your "wild card" exemption. A wild card exemption allows an individual to exempt any assets of a value less than or equal to a given amount. Wild card exemptions vary by state, but any money received from a tax return is eligible to be included in a wild card exemption.
- Rolling over your tax refund to cover taxes for the following year is not a permissible way to avoid declaring those funds in a bankruptcy. The bankruptcy court can demand that the funds be returned, even if the decision to roll over the tax return is irrevocable.
- If you decline to declare your anticipated tax refund amount when filing bankruptcy, the bankruptcy court can petition the IRS to disclose the information and intercept your tax return altogether--regardless of its exemption status.
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