Many people use their tax refund to pay for necessary expenses. For some, the money allows for repairs on their home; for others the refund allows them to pay off some debt or afford medical or dental procedures. But in general, it is money you have been waiting for all year. When you are struggling financially, this extra money can mean a lot. As a result, many individuals ask us whether they will be able to keep their tax refund in bankruptcy.

The bankruptcy court sees a tax refund as a savings account. You pay into the federal government a little every month and at the end of the year it is waiting there for you to withdraw. This refund affects different chapters of bankruptcy, in different ways.

Chapter 7

If you file a Chapter 7 bankruptcy in the later part of the year or during tax season, this money has had a lot of time to accumulate. If you are due a tax refund and file bankruptcy, you can only keep it, if you are able to exempt or protect those funds. In Virginia, there are exemptions that can protect child credits and earned income credits. Any additional part of the refund must be protected under Virginia’s wildcard exemption. This wildcard exemption is $5,000.00 lifetime protection to be use on cash or cash like assets. This means if you have filed bankruptcy previously or have other cash-like assets, you may have less of the wildcard to apply toward your tax refund.

If you want to protect your tax refund in bankruptcy, talk to an experienced bankruptcy lawyer. A bankruptcy attorney will be able to review your situation, discuss any potential issues and figure out the best plan for you. Sometimes this means waiting until the refund is received and used on normal expenses. But, without an attorney that understands bankruptcy law, you will not be able to make an educated decision.

Chapter 13

Now, a tax refund also plays a role in a Chapter 13. If you are in a 100% plan, which means you are fully paying back all allowed claims, you can keep you tax refund every year during your plan. If your bankruptcy plan pays creditors any less than 100%, the trustee may require that you turn over the refund and he/she will disburse the funds to your creditors. Additionally, your attorney may be able to adjust your budget to reflect the refund over the course of a year. This would mean paying slightly more each month, but being allowed to keep the tax refund.

It is important to have an experienced bankruptcy attorney that can review and understand your situation.



Ashley F. Morgan, Esq. is a Northern Virginia Bankruptcy Attorney with an office in Herndon, VA. She helps individuals in Herndon, Reston, Centreville, Fairfax Sterling, Chantilly, Woodbridge, Manasass and the surrounding areas file bankruptcy. She understands the importance that a tax refund can play in someone’s finances. Her goal is for her clients to fully understand all their options and make the best decision for their circumstances.