Bankruptcy and Tax Refunds
When you file a petition for bankruptcy relief, an estate is created by law which entitles the bankruptcy trustee to collect certain property on behalf of creditors https://www.law.cornell.edu/uscode/text/11/541. This entitles the bankruptcy trustee to be a receiver of funds and property so that he/she may collect those funds or property, and distribute them to creditors.
Generally, a debtor's tax refund becomes property of the bankruptcy estate beginning the year that the debtor filed for bankruptcy relief. The bankruptcy estate isn't entitled to the entire refund, however. The estate is usually entitled to a prorated portion based on the date the debtor filed for relief.
In a Chapter 7 Bankruptcy Case
In a chapter 7 bankruptcy case, the bankruptcy estate is entitled to a prorated portion of the debtor's tax return based on the date the debtor filed for bankruptcy relief. For example, assume that the debtor filed bankruptcy in June, 2018, and received a tax refund of $12,000.00 in 2019 for their combined 2018 federal and state tax return. In this case because the debtor filed in June the bankruptcy estate would be entitled to 6 months or $6,000.00 of the debtor's tax refund. The bankruptcy estate would only be entitled to the prorated tax refund for this year. Not the year after or any other following year.
In a Chapter 13 case
In a chapter 13 case, the same analysis as above applies, but the debtor will usually have to surrender their tax refund for each year they are in the chapter plan, unless the debtor and the trustee agree otherwise. If the debtor is in a 100% repayment plan, they are usually not required to surrender 100% of their tax refunds.
It is important to know what portion of your tax refund you will have to surrender if any, if you are considering filing for bankruptcy relief. Please call us at 480-355-1377 for a free consultation.