Several factors will determine whether you can keep your tax refunds if you file for bankruptcy. Sometimes people get to keep their tax refund out of their bankruptcy case, but in other situations, the person filing for bankruptcy might have to give up their refund.
Bankruptcy rules are strict and unforgiving. If you make a mistake, the bankruptcy court could refuse to grant you relief from your debts. A Georgia bankruptcy attorney can help you navigate the treacherous waters of filing for bankruptcy protection and keeping tax refunds out of bankruptcy.
Chapter 7 Versus Chapter 13 Filings
In a Chapter 7 bankruptcy, you are asking the court to discharge your debts and let you start with a clean slate. Not all debts are dischargeable, so you will still have to pay certain debts that cannot be discharged in bankruptcy. Georgia uses a wildcard exemption of up to $11,200 in bankruptcy cases. If you do not need to use that exemption to protect a different asset, and your tax refund is less than $11,200, you could use your wildcard exemption to keep your tax refund.
When you file for a Chapter 13 bankruptcy protection, you are not asking the court to cancel your indebtedness. Instead, you ask the court to approve a plan that gives you more time to pay all of your debtors in full. Once approved, your creditors cannot take any adverse action against you as long as you comply with the terms of the repayment plan.
Under Chapter 13 rules, the court will consider your refund as additional monthly disposable income that must be paid over to the trustee according to your monthly payment plan. You could, however, ask the court to let you keep your tax refund. Each district has different rules about the amount they allow you to keep out of bankruptcy.
The Amount Of Your Tax Refund
In some situations, you could automatically keep a tax refund of $2,000 or less without asking the court for permission. If the district handling your bankruptcy case requires you to file a motion requesting the judge to allow you to keep a refund of more than $2,000 out of your bankruptcy case, you will likely have to justify your need for the extra money. It will be up to the court to grant or deny your motion.
The District Where You File Your Bankruptcy Petition
People who file for Chapter 13 bankruptcy protection in the Atlanta area typically have to surrender tax refunds greater than $2,000 to the bankruptcy trustee (you can retain up to $2,000 of your refund).
Every bankruptcy case is different. There might be specific facts in your situation that would lead to a different result than discussed in this article. Sometimes people wait until after they receive and spend their tax refund before filing for bankruptcy. You will want to talk to a Georgia bankruptcy attorney before spending your tax refund or filing for bankruptcy. For a free consultation, contact our office today.