Getting a tax refund every year is a bad idea because you have basically given the federal government an interest free loan with your money. It makes more sense to change the amount of exemptions you claim on your paycheck so that you will receive more income each payday and the government will hold on to a decreased amount of your income for the year.
One of the biggest objections that potential Chapter 13 bankruptcy clients have is losing their tax refund to the trustee in cases where they are eliminating unsecured debt (in Chapter 13 bankruptcy cases where all of your debt is being paid back to your creditors, you get to keep all of your tax refund). Most people always have big plans for their tax refunds long before they receive them. Some people plan on spending it on that home improvement project that they have been putting off for so long. Others plan on buying new clothes for their kids.
Unfortunately, if you are in a Chapter 13 case that is wiping out unsecured debt in the Northern District of Georgia, the trustee will snatch your tax refund and apply it your debts.
In Chapter 7 cases, tax refunds are usually not an issue unless you will be receiving it after the date your case is filed and before your discharge.
With Earned Income Tax Credit and Child Tax Credits, its not unusual to see some clients receive more than $7,000.00 in a tax refund.
Wouldn’t you rather receive more income each week than sending a large tax refund check to Chapter 13 trustee each year? Of course! Call your person in the payroll department and change those exemptions. However, don’t go to such an extreme that you end up with a tax bill each year. Talk with your payroll person and claim just enough to zero out your tax refund.
Even though I encourage clients to change the number of dependents they claim on the check so that their current income will be increased, most people just don’t do it. I suspect many bankruptcy clients view their tax refund as a savings plan. Putting your money into a bank account that collects interest is a good idea. Giving an interest free loan to the federal government by over paying your taxes ever year is a terrible idea.
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