As we finish the first month of the new year, tax season is starting to pick up. By now many people have gotten their W-2’s or other tax forms from 2016 and they’re ready to file for their 2016 income tax returns. If you’re in bankruptcy, or considering filing for bankruptcy, how will that affect your refund?
First, it is important to know that the bankruptcy court has the authority to require you to pay your income tax refund into your bankruptcy case. However, not every jurisdiction will enforce this rule. Where I normally practice, in the Northern District of Alabama, the Bankruptcy Trustees typically allow debtors to retain their refunds. You may still be required to disclose how much you receive from your refund and use all or a portion of your allowable personal property exemptions to claim your refund as exempt. Basically it’s important to be aware that tax refunds are something you might be required to pay to the Court, but you should consult a qualified bankruptcy attorney in your jurisdiction to be sure how the Court would handle your situation.
Second, it is important to know that voluntarily paying your tax refund into your bankruptcy case may not be beneficial to you. Often clients ask me if they can pay extra on their Chapter 13 bankruptcy cases in an effort to finish the case faster. Usually around this time of the year people are getting their refunds back and want to use that money to pay ahead. As a result of how Chapter 13 cases are structured, it is often the case that the Court is essentially providing a discount of your debts. In these cases if you pay extra into the case, the Court won’t allow you to finish your case faster, but instead would simply take the extra funds you send in and pay your creditors more. In cases where your creditors are already going to be paid back in full through the Chapter 13 plan, then paying extra will help you. As soon as your debts are paid you will receive your Discharge and finish your case.
Everything I’ve said so far is assuming you don’t owe any back taxes or other debts to the IRS. If you have tax debts, then things can get even more complicated. But that’s a topic for another blog entry. If you’ve been considering bankruptcy but you haven’t filed because you are worried it will stop you from filing your taxes, I’d urge you to make an appointment and speak with one of our experienced attorneys. We have convenient offices in Alabama, Mississippi, and Tennessee. We can guide you through the bankruptcy process and answer your questions about tax refunds and tax debts.