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Welcome to Tax Season! With it comes special precautions for people filing Chapter 7 Bankruptcy. You must take special care to protect your tax refund.
All of a debtor’s assets, as they existed on the date of filing, belong to a debtor’s Bankruptcy Estate upon the filing of Chapter 7 Bankruptcy. This includes a debtor’s physical assets such as cars and iPhones. Also included are intangible assets such as the right to sue other people and accounts receivable.
The contents of the Bankruptcy Estate are important because the Chapter 7 Bankruptcy Trustee legally can take assets from the estate. These assets are then sold and the proceeds are used to repay a portion of a debtor’s debts.
It is my goal as a Chapter 7 Attorney to protect a debtor’s assets to the maximum extent provided by law. In California, this is done by using exemptions found in the California Code of Civil Procedure.
A Bankruptcy Attorney must take care to accurately exempt a debtor’s tax refund. Without an exemption, the Chapter 7 Trustee may demand that the refund be turned over to the Trustee.
Using California’s 703 exemptions, a debtor would likely be able to exempt the refund using whatever is left over from the “wildcard” exemption. If a debtor must use the 704 exemptions, protecting the tax refund is much more difficult. This is because there is not a wildcard exemption available.
All of this assumes that a debtor has not already received their tax refund. If a debtor has already received the refund, and can not protect it using the 703 exemptions, then the debtor may consider waiting to file Chapter 7 Bankruptcy. A debtor would wait to file until such time that the refund has been exhausted.
There is nothing wrong with using the tax refund on household purposes such as buying groceries, gas, clothes for the kids, or other reasonable purchases.
If a debtor’s tax refund is very large, there could be a question of whether the money was spent solely on household purchases. In this situation, a debtor would be well advised to keep careful records of how the money was used.
Tax refunds are very important. A debtor filing Chapter 7 Bankruptcy should consult with a Bankruptcy Attorney if they have a tax refund pending.
Please contact my office should you have any questions about tax refunds and Chapter 7 Bankruptcy in Sacramento. My office phone number is (916) 333-2222.
