Tax Refunds and Bankruptcy

Tax season is right around the corner.  A common question is, “What will happen to my tax refund?”  The timing of your bankruptcy filing is important.  If you have NOT received your tax refund yet and file for bankruptcy, the tax refund can later be taken by the trustee appointed to the bankruptcy case.  

The best way to avoid having the trustee take your tax refund is by spending the tax refund first before filing for bankruptcy.  It is important that your tax refund is spent on normal expenditures – rent, mortgage, food, car payments, utilities, etc.  Do NOT spend it on luxury items such as jewelry or vacations.  The trustee can possibly ask for documentation on how the tax refund was appropriated.

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Bankruptcy Trustee Part 2

I previously wrote a basic overview of who the bankruptcy trustee is, and what he/she does.  In Chapter 7 cases when there are no assets, or if all assets are exempt, the trustee is given $60.  This is why most trustees do not have the incentive to belabor a non-asset bankruptcy filing.  Sometimes a client views the trustee as a repoman, however there is nothing to repo if there are no assets or if all assets are exempt. That said, the trustee still performs a thorough review of the petition and may also seek to dismiss the case if he/she finds abuse or intentional misreporting in the petition.

The trustee also ensures that the filer performs their intentions as indicated on the Statement of Intentions (for secured property such as a house or car) which is filed with the Chapter 7 bankruptcy petition.  The intention may be to walk away and surrender secured property, discontinue a lease, or reaffirm a contract.

Overlooked Assets in a Bankruptcy Filing

Full disclosure is one of the most important themes in a bankruptcy filing.  Even if it seems unimportant, if it has any financial relation to you, it should be included in your filing.  Some examples include: forgotten bank accounts, tax refunds, marital settlements, rent security deposits, pawned property, rights as a beneficiary in a life insurance policy and legal claims that have been filed against a 3rd party.

The bankruptcy trustee will be interested in determining whether any of these are non-exempt.  Failure to disclose such assets may lead to a delay in the bankruptcy process or even a denial if it is found that such assets were purposefully hidden.

The Bankruptcy Trustee

A bankruptcy trustee is appointed to represent the interests of creditors in a bankruptcy case.  He or she reviews the petition filing’s schedules, documents and items that are claimed exempt to make sure everything looks proper and that there is no abuse.  If there items that are nonexempt, the trustee will attempt to sell it in order to pay back unsecured debtors.  If the costs of selling an item outweigh the value of the item, then the trustee may allow the bankruptcy petitioner to just keep the item.

The trustee will be present at the 341(a) meeting of creditors.  In reality, the creditors rarely show up in most cases because a bankruptcy petitioner will not have any assets.  The trustee will usually just ask the petitioner to see a government issued ID to confirm the petitioner’s identity, a Social Security Card, the latest tax return, and ask basic questions such as confirming the numbers on the schedules in the bankruptcy filing.  The meeting is usually 5-10 minutes.