Will I Lose My Tax Refund in Bankruptcy?

For some of us, tax season brings a refund that we count on all year long to take care of bills or pay needed expenses.  When you're struggling with debts, it's only natural to wonder whether you'll lose your tax refund if you file a Chapter 7 bankruptcy.  Most people do not.

If you typically get big tax refunds, you'll want to mention this when you speak with a bankruptcy lawyer.    Most people will find that their tax refunds are covered by the exemptions they are allowed under state and federal law.  In other words, you won't lose them because the law says you don't have to share them with creditors.  If most of your tax refund comes from the Earned Income Tax Credit (EITC), for example, that is often protected by state law.  Iowa protects up to $1,000 in tax refunds as well.  In addition, if you file in the middle of the year, the Chapter 7 trustee is unlikely to be too interested in your refunds, since your earnings after you file are yours to keep.

If tax season is near and you know you'll get a big refund that isn't protected by these exemptions, then your lawyer might advise you to wait before you file.  That way you can file your taxes, get your refund, and spend down the funds in a way you and your lawyer decide on.  You'll have to deal with creditors for awhile longer, but it lets you keep your money.