Bankruptcy During Tax Time—Can You Keep Your Refund?
For many taxpayers, an annual refund is an important part of financial planning for the entire year. This can make it difficult to plan for bankruptcy. Tax refunds can be an asset subject to the liquidation powers of the bankruptcy court. However: with careful planning, a tax refund can be protected from the bankruptcy court, and a debtor can both achieve a successful discharge of debts in bankruptcy and keep his or her tax return. Contact experienced Missouri bankruptcy attorney Kenneth P. Carp to learn more about how bankruptcy laws may apply to your particular financial situation.
The Many Ways to Protect a Tax Refund From the Bankruptcy Court
All assets a debtor holds at the time he or she files for bankruptcy are subject to the liquidation powers of the bankruptcy court. This includes a tax refund, which is based upon income earned prior to the filing of a bankruptcy petition. If the tax refund is based upon income earned after the debtor received a final discharge of debts, the refund is no longer subject to the jurisdiction of the bankruptcy court.
So how can debtors protect their tax refunds from going to the bankruptcy trustee? As with any asset, exemptions can be applied to protect it from liquidation. Missouri – like other states – provides a “wild card exemption” which allows up to $1250 of protection for any asset. This exemption is found at Section 513.440 of the Missouri Revised Statutes.
In other cases, the debtor may be able to spend the tax refund on necessary living expenses, such as payment of rent, mortgage, property taxes, or insurance. It is important to be very careful about what the refund is spent on. If the refund simply purchases a different asset subject to liquidation, it is not protected at all. It is also important not to make fraudulent conveyances of the tax refund, which are prohibited by state and federal tax laws. A bankruptcy attorney can help debtors determine what necessary living expenses might be allowable areas in which to spend a tax refund.
Finally, debtors can prepare for bankruptcy by adjusting their payroll withholding with their employers. By selecting the minimum allowable tax withholding, a debtor will reduce the amount of the refund which might become an asset in the bankruptcy estate. This requires some advanced planning. Withholding must be reduced well in advance of a bankruptcy petition in order to significantly reduce the amount of a tax refund.
Experienced Representation for Your Bankruptcy
If you are experiencing financial difficulties, experienced Missouri attorney Kenneth P. Carp can help. He will help you determine whether filing bankruptcy is right for your situation, and help explore other debt relief options when it is not. He will also help you explore the pros and cons of bankruptcy. Tax refunds and other assets can be protected with strategic planning and the reliable advice of an experienced bankruptcy attorney. Call (636) 947-3600 or write us online today to schedule your consultation.