Client signing document with bankruptcy attorney

Using Your Tax Refund To File For Bankruptcy (Or Avoid It) May Not Work Like You Think It Will

This year, the IRS is warning people not to expect tax refunds to process as quickly, or be as large, as they were in the past. This will no doubt prove frustrating to the many Wisconsin families who rely on their tax refund to make ends meet after splurging over the holidays. And others who count on the money to fund big purchases or pay for things they have been putting off. 

Over the years, a few of our Milwaukee area clients have told us protecting or using their tax refund was an important part of their decision to file bankruptcy when they did. This often meant strategically spending a refund to keep the money out of the hands of creditors, or using the cash to pay court fees. 

Whether a bankruptcy filer gets to keep their refund or must hand it over to their creditors depends on what chapter of the bankruptcy code a case is filed under and when the money being refunded was earned. 

Chapter 7 vs. Chapter 13

There are two chapters of the bankruptcy code that people filing for personal bankruptcy typically file under — Chapter 7 and Chapter 13. 

A Chapter 7 bankruptcy is what most people consider a traditional bankruptcy. Assets are liquidated to pay off creditors, and then most of the debts that remain are forgiven. 

A debtor who files for Chapter 7 bankruptcy must turn the money over to the bankruptcy trustee if the refund is for taxes paid in the prior year. If the refund is for taxes paid in the year the bankruptcy was filed, the part of the refund tied to money earned after the case is filed can often be kept by the debtor. 

This is a bit confusing, but basically boils down to the idea that the moment you file for Chapter 7 bankruptcy the court starts to wipe your financial slate clean. Our experienced bankruptcy attorneys would be happy to discuss the timing of your case with you so you can maximize the amount of money you have in your pocket post-bankruptcy. 

People who file for bankruptcy under Chapter 13 typically cannot keep their tax refund, no matter when the money the refund is coming from was earned. Chapter 13 bankruptcies are centered around a repayment plan. The refund money is usually turned over to the bankruptcy trustee to make repayment plan payments, or be used by the trustee to pay off creditors. 

A Full Service Milwaukee Area Bankruptcy Firm

The Hanson & Payne team makes sure our clients know exactly what is going to happen to their tax return if they file for bankruptcy. We know many Milwaukee area residents depend on that money, and if they need it, we want them to be able to use it instead of handing it over to their creditors. This means thinking carefully about when to file for personal bankruptcy, and what chapter of the bankruptcy code to file under. 

If protecting your tax refund, or making sure you can use it to benefit your family is important to you, Hanson & Payne is here for you. Please contact our office to schedule a meeting.