During the new year, people who are considering filing bankruptcy worry about whether they will lose their income tax refund if they file bankruptcy. The short answer is: no, you do not have to give up your tax refund in bankruptcy, as long as you do some planning. Many people deliberately over withhold their income taxes as a way of getting a large refund. This refund is often used for large purchases or to pay annual bills, such as property taxes. People who need to file bankruptcy worry about whether they will lose their refund.
You can protect your refund and still file bankruptcy. If you file a Chapter 7 bankruptcy, you may be able to use your exemption to protect or exempt the tax refund. Whether you have an exemption available to protect the refund will depend on what state you are filing in and what exemptions you are entitled to use. Generally, individuals who are entitled to use the Texas exemptions may choose between state or federal exemptions. Under the federal exemptions, you may be able to exempt a refund (depending on the size of the refund and the amount of the exemption available to you.)
In a Chapter 13 debt reorganization, you simply build the tax refund into your budget. Most individuals and families these days need more money in the budget, not less. It is important to discuss your desire to keep your refund with your bankruptcy attorney.
Don’t let fear of losing your tax refund in bankruptcy keep you from debt freedom through bankruptcy. Talk with a qualified bankruptcy attorney.