When I meet with clients from the Northwest Georgia area, one of the first questions I usually get is, “Can I keep my tax refund if I file bankruptcy?” For some, the answer is yes and for others, the answer is no. Most people have plans for how they are going to spend those tax refunds long before they receive them from the IRS. For some, its clothes for the kids. For others, its car repairs, house repairs, catching up past utility bills and on and on. A few weeks ago, I met with some clients in my Rome office who needed all of their refund to repair their roof. In their case, everything worked out.
So can you keep the tax refund if you file bankruptcy? The answer to this question is maybe. First it depends on what type of bankruptcy case you are filing. Second, it depends on how much of your Georgia Bankruptcy Exemptions have been used up on other assets. Third, how much of your refund can be attributed to the Earned Income Tax Credit?
Lets say you file a Chapter 7 bankruptcy. If you have a tax refund that you anticipate receiving before your case will be discharged, the tax refund must be exempted as an asset in your case. Every case is different. As a general rule in Georgia, if your tax refund is less than $5,000.00, we should not have a problem. However, you must remember that every case is different. If you have other assets that use up all of your Georgia Bankruptcy Exemptions, we may have a problem. We will be able to tell if you have an issue before the case is filed. If your tax refund is based entirely on the Earned Income Credit, you should be able to keep all of it. Make sure you explain to your bankruptcy attorney the amount of your tax refund that can be attributed to the Earned Income Credit.
If you file a Chapter 13, the trustee wants every extra dime you have to be paid toward your Chapter 13 case. As a result, they want all of your tax refund that you receive during the applicable commitment period of the plan. However, you can keep any amount of the refund that can be attributed to the Earned Income Tax Credit. Like I said above, you must disclose all tax refund information to your bankruptcy attorney in order for him to protect any of the tax refund money.