Tax Refunds and Bankruptcy

Everyone loves to get their tax refund. It’s nice to have a little boost of cash, especially when money has been tight for a long time.

What are you going to do with your tax refund?

If you’re planning on filing bankruptcy, or are in the process of filing bankruptcy, here are some important considerations:

  1. Don’t use your tax refund to repay relatives. Paying relatives right before filing bankruptcy is called a “preference.” Creditors convinced Congress that it was not fair for people who file bankruptcy to pay some creditors prior to filing bankruptcy but not all creditors. Congress included in the bankruptcy code a “preference” section which allows the trustee to go after preferred creditors.  For relatives, the trustee can recover funds paid up to one year prior to the filing of the bankruptcy. This means that if you repay your relatives any time in the year before you file bankruptcy, they will be sued to return the money you paid them.
  2. Don’t use your tax refund to repay creditors. These creditors will be considered “preferred” as well. Unlike with relatives, the trustee is limited to 3 months to reclaim the money. If you pay a non-related creditor within 3 months of the time you file bankruptcy any amount over $600, the trustee can sue that creditor and get the money to pay something back to all creditors.
  3. Don’t use your tax refund to buy luxury items. What is a luxury item? Anything that isn’t reasonably necessary for you or your dependents will be considered a luxury. Examples of luxury items could include vacations, expensive clothing, home furnishings, sporting goods, or electronics.
  4. Do use your tax refund for essentials. Rent or mortgage, utilities, and food are essentials. So is child support. Home and car maintenance can also be essential. These are good things to spend your tax refund on.
  5. Do use your tax refund to pay for your bankruptcy. Many of our past clients have used their taxrefund to pay for their bankruptcy and have eliminated tens of thousands of dollars of their debt once and for all.
  6. Do keep track of how you spend your tax refund. Keep the receipts for whatever you spend your tax refund money on. You may find it helpful to use an app like CamScanner to take scans of the receipts as soon as you receive them so they don’t get lost. You can also designate a specific place to keep the receipts in your house, such as an envelope or a file. We will need to have a list of how you spent your tax refund with receipts to show that you have used your tax refund responsibly so that it will be protected from your creditors.

Spend your tax refund responsibly, and keep track of how you spend it, and there won’t be any problems for your bankruptcy case. If you have questions, our office is here to help! Give us a call.


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