What Happens to Income Tax Refunds in Bankruptcy?

Now that we are in tax season, many Oak Park residents are filing their income tax returns and some are expecting refunds. When you are anticipating an income tax refund but are also thinking about filing for personal bankruptcy, it is important to learn more about how tax refunds are handled in a bankruptcy proceeding. In other words, will you get to keep your tax refund if you file for consumer bankruptcy? There is no straightforward answer to that question since the answer depends on a number of different factors. We will say more about how income tax refunds are treated in a bankruptcy case.


Timing of When You Earned the Income Tax Refund

The first question you should ask when determining whether you will get to keep your income tax refund when filing for Chapter 7 bankruptcy is when you earned the income that was taxed and for which you are receiving a refund. Under the U.S. Bankruptcy Code, any refund that results from income earned and taxed prior to the date that you filed for bankruptcy will become part of the bankruptcy estate unless you claim an exemption. We will say more about exemptions shortly.


If you received the income tax refund for taxes paid on income earned after you filed for bankruptcy, then you can keep the tax refund check in its entirety. When you are thinking about “before” and “after” in terms of the timing of your bankruptcy filing, you should think about the tax year. For example, if you filed for bankruptcy in late 2017 and are currently set to receive a tax refund based on income earned in 2018 (keep in mind that you file 2018 taxes in 2019), then you can keep the refund. However, if you are currently thinking about filing for bankruptcy, or if you filed at the end of 2018, any refund check that you could be expecting likely will be property of the bankruptcy estate.


Using Bankruptcy Exemptions to Keep Your Tax Refund

Just because your income tax refund will go to the estate based on the date you earned the income does not necessarily mean that you cannot keep the refund. Illinois bankruptcy exemptions allow debtor to “exempt” certain amounts and types of property in a bankruptcy proceeding.


Illinois has a “wildcard” exemption that allows a debtor to exempt up to $4,000 in personal property. Illinois bankruptcy exemptions also allow a debtor to exempt necessary clothing and other necessary items. If you spend the refund on any necessary items that are exempt, then the refund will in effect be exempt.


If You are Planning to File for Bankruptcy This Year

If you have not yet filed for bankruptcy and are thinking about doing so, you can take steps so that you do not end up with a refund that will end up going to the estate. In short, you can adjust the withholding amount on your paychecks, which will result in you earning more money in each paycheck in the short term and receiving a smaller refund (or no refund at all).


Contact a Bankruptcy Lawyer in Oak Park

In the meantime, if you have questions about filing for Chapter 7 bankruptcy or how your tax refund will be handled, you should reach out to an Oak Park bankruptcy attorney to learn more about your options. Contact the Emerson Law Firm today.


See Related Blog Posts:

Understanding the Timeline from Debt Through Bankruptcy
What is the Difference Between Federal and Illinois Exemptions in Bankruptcy?

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