Protecting Your Tax Refund In Chapter 7 Bankruptcy

Can I Lose My Tax Refund in Chapter 7 Bankruptcy?

tax refund in a Chapter 7

Many people never even consider that their tax refund is an ASSET in their bankruptcy case! Most people count on that little extra tax refund money – to buy a used car, catch up on bills or cover those “cracks” money just seems to run through.

However, it is an asset – even if you have not yet received it back from the government. If you have a tax refund coming at the time you file a Chapter 7 bankruptcy, it is an asset that the Trustee can and WILL take if you cannot protect it with a bankruptcy “exemption.” If you owe money to a state tax entity (like the California Franchise Tax Board) but have a refund coming from the IRS, you lose the refund but still have to pay the State taxes. You don’t get to offset the State tax debt against the IRS refund.

Will I Lose Next Year’s Tax Refund in a Chapter 7 Bankruptcy?

When we talk about “next year’s tax refund” we are speaking about the refund you receive back next year from this years income tax payments. You will figure that out next year.

If you file a Chapter 7 Bankruptcy at any point during the year and the Trustee has reason to believe there will be a substantial return, he or she can claim those, too. The amount will depend on when you file your bankruptcy.

For example, if you filed your Chapter 7 Bankruptcy the last day of May, that meaning you have 5 months pre-bankruptcy filing and 7 months post-bankruptcy filing, the Chapter 7 Bankruptcy trustee would be entitled to 5/12ths of the refund.

1040 How will the Chapter 7 Bankruptcy Trustee know? You have to turn over to the Chapter 7 Bankruptcy trustee two  years of tax returns, so the Trustee will have a good idea how much your next tax refund will be.

 The second reason the Trustee will know is that you have to disclose on your Chapter 7 bankruptcy paperwork ALL   assets you may have no matter what form they are in. If you do not do so honestly, you can have your Chapter 7  bankruptcy discharge denied and still owe all your debts that would have been wiped out in bankruptcy. Worse yet, you can be arrested for bankruptcy fraud and put in prison, not to mention being fined.go to jail

The final reason the Bankruptcy Trustee will know is that they often will require you to provide them a copy of next year’s tax returns to confirm that you are not getting a refund. If you have no job before filing or are clearly not going to get a refund of any size, the Trustee will likely just close the case and allow you to get your discharge.

Is There Any Way to Keep My Tax Refund in a Chapter 7 Bankruptcy?

Yes, there are several ways. 1) If you do not have equity in a house, in California we can often use the California Civil Code §703(5) “wild card” exemption to protect even a fairly large tax refund, if there is not too much else that must be covered under that exemption, like extra cars, etc. Many other states and the Federal system have similar “wild card” provisions. However, there are many times where these wild card provisions are not going to apply. A competent and experienced bankruptcy attorney will be able to advise you on this.

Another way would be, if feasible, wait to file Chapter 7 Bankruptcy until AFTER you receive your tax refund. Then cash it and spend it on items that can be “exempted” or protected such as food, a necessary car, needed home repairs or such. Be sure to discuss this with your bankruptcy attorney before you spend it however. If you use the money to take a fancy unnecessary trip you will find yourself paying the Trustee the value of the trip or denied a Chapter 7 Bankruptcy discharge! You may also want to use the tax refunds to pay to get your bankruptcy done. Call it an investment in getting rid of your other debt problems


If you are planning to file Chapter 7 Bankruptcy in the near future, taking a cash advance from the tax preparation company is actually taking out a loan with them. Most people do not realize that the loan istax refund loan before Chapter 7 bankruptcy NOT a lien on the tax refund. Other than the government, there is no way to lien a tax refund before it is received. You only are authorizing the tax preparer to receive your tax refund. The Chapter 7 Bankruptcy Trustee will take the refund check and the tax preparer will come after you in bankruptcy for fraud because you bankrupted out on the loan. If you read the fine print on these things, they out right say that you are swearing to not file bankruptcy before your check comes back.

What Should I Do?

Contact an experienced bankruptcy attorney before you do anything. It avoids the potential for major problems that could have been avoided if the issue had been handled correctly.

If you are in Sacramento or the Northern California region, Call Fraley & Fraley at (916) 485-5444. Set an appointment with one of our experienced attorneys to find out what your rights are and what you can legally do to save your tax refund in a Chapter 7 bankruptcy!

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