It is that time of year again. If you earned wages in 2015, your employer will be sending you a W-2 any day now. Hopefully you will be getting some type of tax refund from either the Franchise Tax Board or the IRS. How does that affect a bankruptcy case?
Tax Refunds in General
The main reason that you would receive tax refunds is because you over-withheld taxes from your paycheck. I would rather over-withhold rather than end up owing each year. Many people use their tax refunds as a type of savings account.
Your tax refund is considered an asset. Someone, the government, owes you money. Until such time that you have received your money back from the government, your tax refunds are considered an “account receivable.”
Tax Refunds and Bankruptcy
As an asset, your tax refund must be disclosed and accounted for in your bankruptcy filing. If you don’t take the appropriate steps to protect your tax refund, the bankruptcy trustee assigned to your case can intercept and take your refund from you.
For most bankruptcy filers in California, tax refunds can be protected under California’s “wildcard” exemption. This exemption allows a bankruptcy filer to protect a certain amount of assets of any type, whether it be cars, cash in the bank, or even a tax refund.
For bankruptcy filers using 704 exemptions to protect significant amounts of equity in a home, the wildcard does not apply. This can leave a tax refund without an exemption and subject to intercept by the bankruptcy trustee. If you’re protection a large equity cushion in your house, surrendering one year’s tax refund is a reasonable tradeoff.
Bankruptcy filers using the 704 exemptions to protect a house should carefully look at their tax withholding. If typically receive a large tax refund each year and you anticipate having to declare Chapter 7 bankruptcy, it would be wise to re-evaluate your tax withholding. You can make adjustments to ensure that there won’t be a tax refund to take.
Thinking about filing for bankruptcy in the Sacramento area in 2016? Call my office at (916) 333-2222 to discuss your bankruptcy options. Don’t delay!