Blog Post
Can I Keep My Tax Refund After Bankruptcy
- By Mike Daniels
- •
- 18 Mar, 2019
There are a few questions to answer first.
When you file bankruptcy, everything that you own becomes bankruptcy estate property. The Bankruptcy Court appoints a Trustee to "administer" (figure out what is worth keeping, sell that to pay creditors, ignore the rest of it) all of the bankruptcy estate property. That can be pretty scary; you don't want to lose the shirt off your back to get relief from your creditors! Luckily there are a couple of things that prevent bankruptcy Trustees from taking assets from Debtors (people who file bankruptcy) in most cases. First of all, Congress and the New Mexico Legislature both recognized that people filing bankruptcy need to keep some assets or the bankruptcy doesn't really help them all that much. Each legislature composed a list of exemptions. Exempt property is property your Trustee can't take from you because it is necessary for a reasonable standard of living. Your attorney will help you pick which set of exemptions (state or federal) fits your situation the best. Secondly, as a low per capita income state, New Mexicans by and large don't have as many assets in the first place as folks in more prosperous states.
Until your attorney knows which of the two exemption schedules fits you best, he or she probably can't answer the question about whether or not you'll keep your tax refund. The Cliff Notes version is that the New Mexico exemption schedule is better at protecting home equity ($60,000 per spouse in home equity is exempt; only $23,000 per spouse is exempt under the federal exemption schedule), but the federal schedule is better at protecting liquid assets like bank accounts or tax refunds (up to $13,000 per spouse can be exempt). The topic is a lot more complex than this paragraph suggests; you'll need to discuss it with your attorney in detail.
The second question your attorney needs answered is when you receive your tax refund compared to the date you file bankruptcy. If you spent your tax refund a month ago, you probably don't have to worry about your Trustee sticking his or her hand out to intercept that refund. If you prepared your tax returns, you'll be getting a massive tax refund, but you haven't filed the tax returns yet, the refunds are available to the Trustee, and you'll have to think about exemptions as described in the paragraph above.
Finally you should think about your payroll withholdings. If you get a refund every year of $1200 from the IRS, you are giving the IRS an interest free loan! They'll charge you interest, by the way, if you owe THEM any money! You can ask your payroll department to take $100 per month less from your check, so that at the end of the year there isn't any refund to worry about losing! Of course many Americans do like having a sizable refund once a year; they treat it as forced savings.
Either way, this is a topic you need to discuss with your attorney!
Until your attorney knows which of the two exemption schedules fits you best, he or she probably can't answer the question about whether or not you'll keep your tax refund. The Cliff Notes version is that the New Mexico exemption schedule is better at protecting home equity ($60,000 per spouse in home equity is exempt; only $23,000 per spouse is exempt under the federal exemption schedule), but the federal schedule is better at protecting liquid assets like bank accounts or tax refunds (up to $13,000 per spouse can be exempt). The topic is a lot more complex than this paragraph suggests; you'll need to discuss it with your attorney in detail.
The second question your attorney needs answered is when you receive your tax refund compared to the date you file bankruptcy. If you spent your tax refund a month ago, you probably don't have to worry about your Trustee sticking his or her hand out to intercept that refund. If you prepared your tax returns, you'll be getting a massive tax refund, but you haven't filed the tax returns yet, the refunds are available to the Trustee, and you'll have to think about exemptions as described in the paragraph above.
Finally you should think about your payroll withholdings. If you get a refund every year of $1200 from the IRS, you are giving the IRS an interest free loan! They'll charge you interest, by the way, if you owe THEM any money! You can ask your payroll department to take $100 per month less from your check, so that at the end of the year there isn't any refund to worry about losing! Of course many Americans do like having a sizable refund once a year; they treat it as forced savings.
Either way, this is a topic you need to discuss with your attorney!