With tax season here, many consumers have received or will receive a tax refund. What happens to your tax refund if you have already filed bankruptcy, or will be filing for bankruptcy in the future? It would depend on what stage you are at in your bankruptcy case. Here are some scenarios:
You have received a tax refund and you have not filed for bankruptcy yet
If you have already received a refund before you file your bankruptcy case, it would be considered an asset in your bankruptcy estate. However, since you have not filed your bankruptcy case yet, if you require the funds from your tax returns for necessary expenses, such as food, shelter, utilities, property taxes, attorney fees, etc. you are free to spend it on such items. If, after using your funds from your tax return for all the necessary items, you still have money left over, it will need to be included in your bankruptcy petition. These funds will need to be exempted. See Asset Protection in Bankruptcy for more information about California exemptions.
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Your bankruptcy case is filed, but you expect or have already received a refund
If you have not received a refund before filing your bankruptcy case, whether you are able to keep your tax refund will depend on how much the exemptions you have available. First, one of the most important aspects is to be sure that your expected refund (even if you have not received it yet) is listed on your petition. If you have exemptions available, then it will be protected and you would be able to keep all of the exempted refund. If you do not have any exemptions available, then the trustee may be able to take a pro-rated portion of your tax refund for the benefit of your creditors in the bankruptcy estate.
You expect to receive a refund, but it was not listed in your bankruptcy petition
If you know you will receive a refund but you intentionally decide to not disclose it in your bankruptcy petition, the bankruptcy trustee may require you to turn over the funds to the bankruptcy estate for the benefit of your creditors. It is extremely important that during tax season that you communicate to your bankruptcy lawyer whether or not you will receive a tax refund from your state and the Internal Revenue Service. In most cases it can be protected, but only if your bankruptcy attorney knows about the refund.
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