Can you lose your tax return in a chapter 7 bankruptcy? Yes you can it is considered money owed there for an asset. Here we will look more closely into the how and why.

1. Can I Lose My Tax Return in a Chapter 7 Bankruptcy?
Many people never even consider that their tax refund is
an ASSET in their bankruptcy case! Most people count on that little
extra tax refund money – to buy a used car, catch up on bills or
cover those “cracks” money just seems to run through.
However, it is an asset – even if you have not yet received it back
from the government. If you have a tax refund
coming at the time you file a Chapter 7 bankruptcy,
it is an asset that the Trustee can and WILL take if
you cannot protect it with a bankruptcy “exemption.”

2. P
If you owe money to a state tax entity
(like the California Franchise Tax Board)
but have a refund coming from the IRS,
you lose the refund but still have to pay
the State taxes. You don’t get to offset
the State tax debt against the IRS refund.

3. Will I Lose Next Year’s Refund in a Chapter 7 Bankruptcy?
When we talk about “next year’s tax refund” we are speaking about the
refund you receive back next year from this years income tax payments. You
will figure that out next year.
If you file a Chapter 7 Bankruptcy at any point during the year and the
Trustee has reason to believe there will be a substantial return, he or she can
claim those, too. The amount will depend on when you file your bankruptcy.
For example, if you filed your Chapter 7 Bankruptcy the last day of May, that
meaning you have 5 months pre-bankruptcy filing and 7 months post-
bankruptcy filing, the Chapter 7 Bankruptcy trustee would be entitled to
5/12ths of the refund.

4. How will the Chapter 7 Bankruptcy Trustee know? You have to turn over
to the Chapter 7 Bankruptcy trustee two years of tax returns, so the
Trustee will have a good idea how much your next tax refund will be.

5. The second reason the Trustee will know is
that you have to disclose on your Chapter 7
bankruptcy paperwork ALL assets you may
have no matter what form they are in. If
you do not do so honestly, you can have
your Chapter 7 bankruptcy discharge
denied and still owe all your debts that
would have been wiped out in bankruptcy.
Worse yet, you can be arrested for bankruptcy fraud and put in
prison, not to mention being fined.

6. The final reason the Bankruptcy Trustee will know is that they often
will require you to provide them a copy of next year’s tax returns to
confirm that you are not getting a refund. If you have no job before
filing or are clearly not going to get a refund of any size, the
Trustee will likely just close the case and allow you to get your
discharge.

7. Is There Any Way to Keep My Tax Refund
In Chapter 7 Bankruptcy?
Yes, there are several ways. 1) If you do not have equity
in a house, in California we can often use the California
Civil Code §703(5) “wild card” exemption to protect even
a fairly large tax refund, if there is not too much else that
must be covered under that exemption, like extra cars, etc.
Many other states and the Federal system have similar
“wild card” provisions. However, there are many times
when these wild card provisions are not going to apply. A competent,
experienced bankruptcy attorney will be able to advise you on this.

8. Another way would be, if feasible, wait to file Chapter 7
Bankruptcy until AFTER you receive your tax refund. Then cash it
and spend it on items that can be “exempted” or protected such
as food, a necessary car, needed home repairs or such. Be sure to
discuss this with your bankruptcy attorney before you spend it
however. If you use the money to take a fancy unnecessary trip
you will find yourself paying the Trustee the value of the trip or
denied a Chapter 7 Bankruptcy discharge! You may also want to
use the tax refunds to pay to get your bankruptcy done. Call it an
investment in getting rid of your other debt problems

9. Another way would be, if feasible, wait to file Chapter 7 Bankruptcy
until AFTER you receive your tax refund. Then cash it and spend it
on items that can be “exempted” or protected such as food, a
necessary car, needed home repairs or such. Be sure to discuss this
with your bankruptcy attorney before you spend it however. If you
use the money to take a fancy unnecessary trip you will find yourself
paying the Trustee the value of the trip or denied a Chapter 7
Bankruptcy discharge! You may also want to use the tax refunds to
pay to get your bankruptcy done. Call it an investment in getting
rid of your other debt problems

10. Do Not Get a Tax Refund Advance From Your Tax Preparer!
If you are planning to file Chapter 7 Bankruptcy in the near
future, taking a cash advance from the tax preparation company is
actually taking out a loan with them. Most people do not realize that
the loan is NOT a lien on the tax refund. Other than the
government, there is no way to lien a tax refund before it is received.
You only are authorizing the tax preparer to receive your tax refund.
The Chapter 7 Bankruptcy Trustee will take the refund check and the
tax preparer will come after you in bankruptcy for fraud because you
bankrupted out on the loan. If you read the fine print on these
things, they out right say that you are swearing to not file
Bankruptcy before your check comes back.

11. Remember the saying, “Knowledge is power.”
Isn’t it time you got your power back?

12. ,
Brought to you by:
Gary Ray Fraley is one of only 130 attorneys Certified by
the California State Bar Board of Legal Specialization
as a Bankruptcy Law Specialist. Mr. Fraley is the
founder of the Fraley & Fraley law firm. He has more
than 35 years of bankruptcy law experience. His
primary office is located in Sacramento, but he also
handles cases in most of Northern and Central California.