How Does Bankruptcy Affect My Tax Refund?

How Does Bankruptcy Affect My Tax Refund?

The broad answer to that question is: Mostly no.

In general, tax refunds are considered to be part of the assets of your estate like money in the bank. Nj bankruptcy exemptions allow each person to exempt or protect up to $13,000 in any assets, including tax refunds. Absent other substantial assets, refunds are rarely a problem. If tax refunds create issues, solutions include:

  • Don’t have one. You can adjust your payroll deductions so that just the right amount is taken out to reduce your refund to zero or close to it.
  • Sent it BEFORE filing for bankruptcy. However, you must be careful about how you spend your tax refund money. First and foremost: do NOT spend it on luxuries or acquiring new hard assets (possessions). You must spend it on necessary living expenses such as rent, mortgage payments, food, utilities, clothing, educational expenses, medical/dental expenses, insurance and the like. Do not use tax refunds to pay debt that will be included in your bankruptcy petition.

In chapter 13 bankruptcy, payments are made to a trustee, usually to catch up delinquent mortgages, taxes and car loans. you must show a budget with sufficient income over expenses to cover the trustee payment. The inclusion of tax refunds as income will yield unexpected results. The best solution is to adjust your withholding to ensure that you have only a minimal refund.