When you’re in debt, every dollar you spend and save counts, which is why receiving your tax refund can be incredibly helpful. However, if you’re considering filing for bankruptcy, it’s imperative to understand what can happen to these funds in the process. If you’re unsure whether or not you can keep your tax refund during this process, you’ll want to keep reading. Additionally, you’ll learn whether or not you can spend these funds before filing and the importance of working with a Memphis, TN consumer bankruptcy lawyer to assist you through these difficult times.
How Does Bankruptcy Affect a Tax Refund?
It’s imperative to understand that, in most instances, your tax refund will be considered part of your bankruptcy estate, meaning it is subject to distribution to repay creditors. However, how the funds will be used by the bankruptcy court will depend on your unique circumstances.
During Chapter 7, your tax refund can be seized by the court and used to repay your creditors. Typically, the trustee assigned to your case will be able to take the portion of your tax refund that covers the period before you filed, called your “pre-filing” portion. However, you may be able to keep the remaining portion of the funds.
When you file for Chapter 13, it’s important to understand that your tax refund will be considered disposable income and, therefore, will be used to repay creditors as part of your repayment plan. However, there are some instances in which you can retain the funds, such as medical expenses, emergency home repairs, or childcare costs. Your attorney can help you file a motion with the bankruptcy court to retain these funds.
You should also note that, depending on your circumstances, you may be able to claim an exemption to protect the funds. It’s important to understand that Tennessee does not allow filers to utilize federal bankruptcy exemptions, so you’ll be required to select a state exemption that works for your circumstances.
Can I Spend These Funds Before Filing?
In the event that you obtain these funds before you declare bankruptcy, it’s vital to understand the impact that spending these assets can have on your case. The trustee assigned to your case will examine your finances and transactions in the months leading up to your filing, including if and how you use your refund.
Typically, you are required to use these funds for basic necessities, like groceries, utilities, or rent. In the event you use your tax refund for luxury purchases leading up to your filing, the court may require you to reimburse the cost of the purchase, or even accuse you of attempting to commit bankruptcy fraud.
You should also note that you should not use these funds to repay creditors, especially friends or family members. You’ll find that this is considered a preferential payment, and the bankruptcy court can actually “claw back” the funds from the creditor. This is because this is unfair to the other creditors in your case.
As you can see, navigating bankruptcy can be an incredibly difficult process, especially when you’re unsure what will happen to assets like your tax refund. That is why it’s imperative to connect with an experienced attorney with the Arnold Law firm to assist you during these complex matters. Our team understands that bankruptcy can be overwhelming, and you may be unsure of your legal rights, which is why we are here to help. Contact us today to learn more.
