Bankruptcy and Tax Refunds – What To Know
Tax season is here, and there are some important things to keep in mind about how to use your refunds if you’re going to receive them and spend them before filing your bankruptcy case.
First, if you repay unsecured debt – especially loans from friends and relatives – with tax refund money, you could open up a can of worms for the person you’re trying to repay. Bankruptcy trustees can recover these payments if they exceed $600 when you file your case.
So, generally speaking, it’s a great idea to avoid making these kinds of payments before filing. If you have friends or relatives you need to repay with that money, please call us first so we can plan a safe way for you to be able to do this.
Using tax money to pay on secured debt (car loans, mortgages, and the like) generally doesn’t pose a problem, and paying rent and living expenses is generally fine as well.
New purchases, like moving expenses, security deposits, buying a vehicle, furniture, or things you need for the kids are generally fine too, so long as those purchases don’t exceed the available exemptions.
You can use your tax refunds to pay for the filing of your case, and the court fees, without a problem. Tax season is by far our busiest time of the year for this exact reason since it’s one of the easiest ways to leverage your return to get out of debt and get on to a fresh start.
If you plan to file before filing your 2021 taxes, or before you receive your refund, some or all of your refund may be exempt from collection by the bankruptcy trustee. Earned Income Credit and Additional Child Tax Credit are protected, so if your refund contains these you will get to keep that money even if you file before the refunds arrive.
Please note that all of this is general guidance, but your case could involve nuances that we should speak about as we plan your bankruptcy case. If you have questions about your tax refunds and safe ways to use those funds – or questions about your case in general – please fill out the form below or if you prefer you can always call or text us anytime at 720-515-9887.
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