What Can Happen if I Don't Give My Income Tax Refund to the Trustee After Bankruptcy?

By Mary Jane Freeman

Once you file for bankruptcy, there are certain rules you must follow throughout the process. For example, you must disclose any and all assets to the bankruptcy trustee assigned to your case, including money received from a tax refund, even after you receive a bankruptcy discharge. If you fail to do so, the trustee may consider this an attempt to hide assets and revoke your discharge; this, in turn, would have the effect of restoring your debts and liability.

Once you file for bankruptcy, there are certain rules you must follow throughout the process. For example, you must disclose any and all assets to the bankruptcy trustee assigned to your case, including money received from a tax refund, even after you receive a bankruptcy discharge. If you fail to do so, the trustee may consider this an attempt to hide assets and revoke your discharge; this, in turn, would have the effect of restoring your debts and liability.

General Overview

Most individuals file for either Chapter 7 or Chapter 13 bankruptcy. In Chapter 7 bankruptcy, the bankruptcy trustee collects and liquidates all your nonexempt assets and disburses the proceeds to your creditors. Any eligible debts that remain unpaid are discharged, meaning they are no longer your responsibility. In Chapter 13 bankruptcy, you don't give up your assets. Instead, you enter into a three- to five-year repayment plan in which you pay some or all of your debts. Any eligible debt left over is discharged, just as in a Chapter 7 proceeding.

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Chapter 7 and Refunds

In bankruptcy, a tax refund is considered an asset. If you file for Chapter 7 bankruptcy, that means you must disclose its existence to the bankruptcy trustee so he can liquidate it along with your other assets. The only way you can prevent this from happening is to find an exemption for it under federal or state law. Exemptions are categories of property that may be protected from seizure, up to a prescribed dollar amount. While there isn't a specific exemption for tax refunds under either federal law and most state laws, you can protect your refund using the popular "wildcard" exemption. This is a catch-all category that allows you to protect whatever property you want, up to a certain value. Depending on your state, you may be able to choose between either the federal or state wildcard exemption, or you may be limited to your state's wildcard exemption only.

Chapter 13 and Refunds

Since assets are not seized in Chapter 13 bankruptcies, you are not required to hand over your tax refund to the bankruptcy trustee. However, you still must disclose the existence of these funds because the trustee will include them in the calculation of your disposable income. In general, the trustee will take your income from all available sources and subtract reasonable and necessary expenses -- such as food, rent and utilities -- to come up with your total disposable income, which is then used to establish your monthly payments under the repayment plan.

Consequences

If you are unable to exempt some or all of your refund in a Chapter 7 bankruptcy, whatever is not protected must be handed over to the bankruptcy trustee. If you fail to do so and the trustee later finds out, your bankruptcy discharge will be denied or revoked. This means your debts will not be discharged and you will continue to owe them. So not only will you have lost your assets to seizure, including the tax refund, but you will still owe the debts you were attempting to extinguish with bankruptcy in the first place. With a Chapter 13 bankruptcy, the trustee has the option of dismissing your case, making you once again responsible for the debt, or converting it into a Chapter 7 bankruptcy, if you qualify, which means you'll have to give up the refund and all other assets.

Special Note

Occasionally, a bankruptcy trustee will choose not to seize a tax refund or incorporate it into a repayment plan. There are a number of reasons why this may happen. Sometimes, for example, the bankruptcy debt is satisfied by the inclusion of other assets or income. Other times, the debtor might demonstrate an extraordinary need for the funds.

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Ways to Exempt Your Refund in a Bankruptcy

References

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Pros & Cons of Filing Bankruptcy

Individual debtors frequently file for bankruptcy under Chapter 7 or Chapter 13 of the Bankruptcy Code, and either course can provide more pros than cons for certain debtors. To file under Chapter 7, you must meet certain income qualifications, but under Chapter 13, you must follow a repayment plan over three to five years. At the end of either type of bankruptcy, you may receive a discharge, or elimination, of certain remaining unpaid debts.

Chapter 7 Bankruptcy Laws for Personal Debt

Chapter 7 bankruptcy is one of several types of bankruptcy available to debtors. Under a Chapter 7 bankruptcy, any nonexempt assets you own are sold and the money distributed among your creditors. The court will then discharge any debts you still owe to these creditors. You must petition a bankruptcy court and meet certain eligibility requirements before you can obtain a Chapter 7 debt discharge.

How to File Bankruptcy While on SSI & Disability

Bankruptcy often provides a fresh start for those who are overwhelmed by debts and at risk of losing their homes or other property. If most or all of your financial support comes from Social Security or disability benefits, filing for bankruptcy may not be the best solution for certain debt problems because creditors are prohibited from taking those benefit payments. However, if you earn additional income or have assets you want to protect, filing for bankruptcy allows you to keep your benefits while still addressing your debt.

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