One Way to Keep your Tax Refund in a Chapter 7 Bankruptcy
In a Chapter 7 bankruptcy, the bankruptcy trustee, an attorney appointed by the Judge to review your case, sells and liquidates all your nonexempt assets (property and money). The trustee then distributes the unexempt funds to your creditors. In exchange, you get out of the obligation to pay any of your eligible debts.
In bankruptcy, a tax refund is considered an asset. If you file for Chapter 7 bankruptcy, you must tell the trustee about any upcoming tax refunds (including the upcoming year which may not have been filed). The trustee can liquidate anticipated tax refunds along with your other assets. The only way you can prevent this is to find an exemption for the funds under federal or state law, which in Missouri is only about $600 for individuals. You may also get some exemptions if you have a family, but it may not cover the entire amount of the tax refund. Lastly, in Missouri, some portions of the tax refund are exempt from liquidation, and those include earned income credit and the child tax credit.
One sure fire way to keep your tax refund in a Chapter 7 Bankruptcy in St. Louis is to file and spend your refund amounts before filing bankruptcy. If you are close to the end of the year, wait until the next year so you can file your tax returns and get your refund as soon as possible. You must have received and spent the amounts. Any amounts in bank accounts are available to the bankruptcy trustee unless exempt (as discussed above).
However, you must use extreme caution about you spend the refund amount. Consult your attorney for exact details. Paying off creditors, friends, or family are prohibited for a certain extent. Spend the refund on everyday goods, utility bills, current rent or mortgage payments, groceries, supplies for dependent's schooling, and everyday living expenses. Get everyday life in order before you file bankruptcy, but don't make any large purchases.
There are a lot of pitfalls here that can get you into some trouble. If you make preferential transfers (payments to friends or family), you will have to pay those bank to the bankruptcy trustee. If you do file bankruptcy and have some upcoming tax refunds, whatever is not exempt must be handed over to the bankruptcy trustee. If you fail to do so and the trustee finds out, your bankruptcy discharge will be denied or revoked. This means your debts will not be discharged and you will continue to owe them. Talk to your attorney if you think you are anticipating a tax refund.
Since 1997, the St. Louis attorneys at The Law Office of Tracy A. Brown, P.C., have helped hundreds in Saint Louis stop creditors from harassing, garnishing, and threatening clients through Chapter 7 and Chapter 13 bankruptcy filings that alleviate excessive debt. Contact us today to free your future from your past.