When tax season rolls around, people and families look forward to receiving and spending their federal tax refund. It is not uncommon for people to rely on their tax refund to pay-off debts or other household expenses. Sometimes, the refund is just some old fashion spending money. However, people in California who filed for bankruptcy might have concerns about what happens to their refund. Will they get to keep it? The honest answer is, it depends. Below, our Roseville, CA bankruptcy attorney from the Bankruptcy Law Group looks at how your tax refund is affecting by filing for Chapter 7 or Chapter 13.

Chapter 7 Bankruptcy in California and Your Tax Refund

When you file for Chapter 7, timing is everything. Our Sacramento, chapter 7 bankruptcy attorney will work with you to help ensure that, if you have control, the timing of your bankruptcy filing works best for you. In terms of your tax refund, you could keep the entire amount or lose it completely. Whether this occurs depends on several factors, including when you file your case.

When you file a bankruptcy petition, along with the related documents and schedules, it presents a picture of your financial situation and assets as of the filing date. Everything you own, including personal property, bank accounts, and your home, becomes part of what is known as the bankruptcy estate. Our office will use one of California’s two sets of exemptions to protect as much of your property as possible. Anything that is not covered under the available exemptions is available to a court-appointed trustee. The trustee will take possession of your property, sell it, and distribute the proceeds to your creditors. Fortunately, most debtors who file for Chapter 7 can protect all their property.

But what about your tax return?

If you have received your tax return before filing your bankruptcy petition, it is a part of your bankruptcy estate. Any amount that is not exempt or was not used to pay expenses that are allowable under the Bankruptcy Code, such as rent, mortgage, or utilities, is available to the trustee.  If you used the funds for a luxury item or to pay creditors, the trustee could petition the court for the return of the funds.

If you filed your bankruptcy petition before receiving your tax refund, then when you earned the income will determine what happens with your tax refund. First, if your tax refund is for income that you earned during the year before your bankruptcy was filed, it becomes part of the bankruptcy estate and is available for the trustee to take to pay your creditors.

If your tax refund is for income that you earned after your bankruptcy petition was filed, it belongs to you, it is not part of the bankruptcy estate, and the trustee cannot take it. In most cases, unless the timing is perfect, a portion of your tax refund will belong to the bankruptcy estate and a part will be yours.

Your Tax Refund and Filing for Chapter 13 Bankruptcy in California

Chapter 13 is a reorganization of your debt. The two significant differences between Chapter 7 and Chapter 13 are the length of time the bankruptcy lasts and the fact that you will be required to pay your creditors through a monthly payment. Our Sacramento, CA bankruptcy attorney will propose a bankruptcy plan that will pay your creditors according to the type of debt you have, your household income, and whether you have non-exempt property. Our office will have to calculate your ordinary household expenses into the plan and comply with the Bankruptcy Code. When calculating your plan, all income that is not dedicated to allowable expenses must be used to pay your creditors. This income includes your tax refund.

Because a Chapter 13 bankruptcy will last years, you will likely be entitled to a number of refunds throughout your case. Additionally, your future tax returns will not fall within the exemptions available under California law.

Our office will work with you, and your specific circumstances, to address your tax refunds. In cases where the refund is predictable and likely to be approximately the same amount every year, it might be factored directly into your monthly income and expense calculations.

If your tax refunds are subject to large swings, then our Folsom Chapter 13 bankruptcy attorney will have to plan accordingly. It is possible that your Chapter 13 trustee will want to see a copy of your returns and will expect the refund to be used to fund your plan. The benefit of applying your refund to your plan is that it might allow you to complete your bankruptcy faster.

Our office might also suggest that you amend your tax returns to limit or eliminate any tax refund. You have control over the amount of taxes you pay monthly. While a refund might be desirable after you file your federal taxes, if you are in bankruptcy, those funds will likely go to your creditors. Through careful planning, you can retain more control over your funds throughout the year.

Call Our California Bankruptcy Attorney to Review Options Regarding Your Tax Refund

Many people in California have misconstrued notions regarding bankruptcy. While it was designed to help people obtain a fresh financial start, there are some potential issues a first-time filer will not anticipate. If you are considering filing for bankruptcy, our Sacramento bankruptcy attorney will assist you in understanding the entire process. When dealing with a tax refund, timing and planning can go a long way to easing the potential burden of losing your refund. Call The Bankruptcy Group at 800-920-5351 to schedule a free, confidential consultation to discuss how we can help you keep your tax refund.