Tax Refunds and Bankruptcy

Budget Your MoneyTax refunds are treated differently in bankruptcy depending on whether the case is filed under Chapter 7 or Chapter 13.  In Chapter 7 cases the debtor is required to have filed his last four years income tax returns.  If he has not filed his returns then he may not receive a discharge.  If a return has been filed and the debtor has already gotten his refund or is expecting a refund, then the money can be exempted.  This means that the debtor protects the property from the trustee using the exemptions available to him.  In Texas, assets like cash in bank accounts or tax refunds not yet received are nonexempt and part of the bankruptcy estate, unless the debtor is able to use a wild card exemption under the Federal exemptions to protect the property.  However, if the debtor has substantial equity in a house then they may have to use Texas exemptions, which means that the property will not be exempt, and the trustee will require that the funds be handed over.

In Chapter 13 bankruptcy tax refunds are treated as income.  Most Chapter 13 trustees have a policy in their office regarding tax refunds.  In the Northern District of Texas debtors get to keep the first $2,000 of a refund but must hand over the remaining amount to the trustee.  When this happens the funds are paid into the reorganization plan and the money is paid to the creditors.  In the Eastern District of Texas the trustee takes the entire amount of any refund exceeding $2,000 but allows the debtor to keep any refund under $2,000.  If you are considering filing bankruptcy and are expecting a tax refund then you should speak with a local bankruptcy attorney.  As you can see the rules regarding tax refunds in bankruptcy cases can vary greatly from state to state and even between different districts within the same state.