Thursday, February 6, 2014

Do you lose your tax refund if you file chapter 7 bankruptcy?

Each year, individuals and families rely on their tax refunds to help support themselves and pay for things like medical and dental work, home or car repairs or other basic needs. For some, a tax refund is sort of a forced savings account that they rely on each year to help get them by.

You may have heard that if you file a chapter 7 bankruptcy (especially in Oregon) you will lose all or part of your tax refund for that year.

Although that can happen, Oregon chapter 7 debtors have a much better chance of protecting their tax refunds now that they can elect to use Federal Exemptions (as of July 1, 2013).  When possible, the Federal Wildcard Exemption can be used to protect the share of a tax refund that would have otherwise not been protected.  An attorney should claim the wildcard exemption against any potential tax refunds that will become property of the estate when the case is filed. 

In some cases the Debtor either can't use Federal Exemptions, or has no wildcard left to apply to a tax refund. In that case, the Debtor and the Attorney may be able to do some prebankruptcy planning to still protect some of the refund, or perhaps spend some of the refund down before filing so it is not an asset of the bankruptcy estate.  This can be tricky and to make sure you are doing permissible prebankruptcy planning you should have an experienced attorney advising you.

For more bankruptcy information, feel free to visit us online, or to schedule a free consultation call us anytime at 503-352-3690.