At this time of year, it is always important to keep your income tax refund in mind if you are planning on filing for Chapter 7 bankruptcy. If you want to keep your refund rather than hand it over to the bankruptcy trustee, follow these simple tips to keep your money. First, be sure to consult with a bankruptcy attorney before you do anything. Bankruptcy laws can be complex and you do not want to inadvertently hand over your money to the bankruptcy trustee. Nor do you want to put your friends or family members in the bankruptcy trustee's cross hairs.
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The best advice to handling tax refunds in Chapter 7 proceedings is to get your refund before you file. That way, you have an opportunity to spend your money in a way that will be exempt from the bankruptcy trustee. You will want to consult with an attorney to make sure you spend your money on property that is exempt. For purposes of bankruptcy law, exempt property simply means property that a bankruptcy trustee cannot take and sell to creditors. Perhaps you could spend your tax refund on rent, or get your car repaired. Simply put, it is important you spend your money on things that the bankruptcy trustee cannot get to. However, what you can spend your tax refund on varies from state to state, so it is important to consult with a bankruptcy attorney.
Finally, be wary of using your refund to pay back one of your creditors. For example, the law considers any payment to a friend or relative exceeding $600 for the year prior to your filing for bankruptcy a preferred payment. If the bankruptcy trustee learns of such a payment, they can get the money back from your friend or family member. The bankruptcy trustee will also inspect the payments you made to a "regular" creditor within 90 days of your filing for bankruptcy. If you tried paying off a credit card with your tax refund within 90 days of filing for bankruptcy, the trustee can take that money back and distribute it evenly to your other unsecured creditors. That would be bad on two counts. First, you would have given money to a creditor when you could have spent it on yourself. Second, it can cause undue headaches with the creditor who lost the money. It is a classic lose-lose scenario.
As you can see, it is important to plan ahead when it comes to your tax return. It is not terribly complicated, but it can be a treacherous area for the unprepared. Be sure to consult with a bankruptcy attorney before spending your income tax refund. Otherwise, you risk losing it.
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