You’re thinking about filing for bankruptcy in New York and you’re wondering, What will happen to my tax refund when I file my case? After all, you rely on that big check to carry you through for a number of essential reasons. For some, it’s forced savings through the year. For others, it’s like a late holiday present.
Either way, it’s important to remember that a tax refund is property. And as property, you’ve got to disclose it on your bankruptcy schedules.
If you’re looking at a Chapter 7 bankruptcy, you need to worry about exemptions. There is a cash exemption of up to $2,500 per debtor (in other words, if you file for bankruptcy with your spouse then you get $2,500 each). This exemption covers cash as well as cash equivalents (think: checking and savings accounts), so it will cover those tax refunds as well. It’s important to know, however, that this cash exemption is available only if you are not looking to protect your primary residence using an equity exemption.
To the extent that an available exemption does not cover the full tax refund, you may be forced to surrender it to the trustee assigned to your case. But even if you were to lose the full refund, does it come close to the amount of debt you’re going to wipe out in your bankruptcy case?
Yes, I understand that you want the tax refund. You’re counting on it. You depend on it. The money’s probably spent before the check arrives in the mail. But let’s balance the books a bit and look at this from a dollars-and-cents perspective. Let’s say you’re going to discharge $35,000 in credit card debt by filing for bankruptcy. The tax refund is, let’s say, $6,500. Even if none of it is exempt, you’d end up effectively settling your credit card debt for 18 cents on the dollar.
Not too shabby, huh?
What most people do, however, is wait until they’ve received their tax refunds to file their Chapter 7 bankruptcy case. Get the money, spend it on regular expenses like rent and utilities, and use the balance to pay for your bankruptcy case. You’ll want to keep receipts and a paper trail so the trustee doesn’t think you’re hiding the money under the mattress (or you went to Vegas for the weekend and spent it all).
Just to be clear – I’m not advocating that you blow the tax refund before walking into a bankruptcy lawyer’s office. All I’m saying is that sometimes the timing of your bankruptcy filing is made even more important by the nature and character of your personal property.