Your right to receive an income tax refund is considered an asset on the date you file for Chapter 7 Bankruptcy. The Chapter 7 Trustee may take a pro-rata portion of the income tax refund you will receive from filing your next income tax return. For example, if you file for Chapter 7 on October 1, you have “earned” 9 months of the tax refund you will receive from your next income tax return, and the Chapter 7 Trustee may take 9/12 (or 3/4) of your refund. If you file for Chapter 7 on January 1, you have “earned” all 12 months of the tax refund you will receive from your next income tax return, and the Trustee may take all of your refund.
However, you may claim an exemption in the right to receive an income tax refund, in the amount of $ 400 (which exemption also includes any cash you have on hand and funds you have on deposit in banks or other financial institutions). You may also use the wild card exemption to exempt an additional $ 1,075 of the amount you expect to receive as a tax refund from your next income tax return.
Also, you can exempt all of any earned income tax credit and all of any child tax credits that you expect from your next income tax return.
Is is better to wait until you have filed your income tax return and received your refund before filing for Chapter 7? The answer depends upon your particular circumstances. If you wait until shortly after you receive your tax refund before filing for Chapter 7, the Chapter 7 Trustee may make you pay back a portion of the refund you have spent which can be extremely difficult for you. I strongly recommend that you discuss your particular circumstances with me, to enable me to advise you which would be the better course of action for you.
The right of the Chapter 7 Trustee to take a portion of your income tax refund is limited to one time. The Chapter 7 Trustee cannot claim any interest in any of your income tax refunds you may receive in any future years.