When you are considering bankruptcy, every little extra bit of money can help, which is why many people worry about the impact of a bankruptcy on an income tax refund asking, “Can I keep my tax refund while filing for bankruptcy?” Unfortunately, the answer isn’t so clear-cut.
Generally, the trustee will want to take your tax refund and include it as an asset in the estate, because it is both already liquid and technically is the debtor’s money that was unnecessarily paid to the IRS. Therefore, your refund is treated like cash. If you have not maxed out your cash exemption within your bankruptcy, it is generally spent towards your debt plan in Chapter 13. If you file for Chapter 7 bankruptcy, you generally owe back the portion of your refund that came from income before the date of filing.
Exemptions That Allow You to Keep Your Tax Refund
There are, however, some exemptions that may allow you to keep a portion or even all of your tax refund. Under Chapter 7 bankruptcy in Ohio, the Earned Income Tax Credit and the Additional Child Tax Credit are exempt from bankruptcy proceedings. That means that if you qualify for a tax refund under either of these credits, you may keep it. In addition, you can protect your entire tax refund under the Wildcard Exemption, which permits you to keep up to $1,225 of value in any property. If you choose, you can apply this exemption to the value of your Wildcard Exemption.
Under Chapter 13 bankruptcy, exempting your tax refund from the estate controlled by the trustee is more difficult. Since under the Chapter 13 debt reorganization plan, all disposable income is paid into the plan and most trustees consider a tax refund to be disposable income, the tax refund is generally automatically allotted to the plan. You can, however, exempt this sum from being paid into the plan by filing for a plan modification. Under a Chapter 13 plan modification, you are allowed to spend a large sum of money not accounted for in the plan on an unexpected expense. This means that you would be allowed to put your tax refund towards something like auto repairs, appliance replacement, medical and dental bills, or funeral expenses.
How an Ohio Bankruptcy Attorney Can Help
For many people, keeping a tax refund can make a big difference in their financial status, which is why it is a shame to let it go straight towards your bankruptcy if there are other options. Talking this over with an experienced Ohio bankruptcy attorney can help you to keep that refund and apply it where it is really needed. Call the dedicated Ohio bankruptcy attorneys at Luftman, Heck, and Associates for a free consultation on your case today at (216) 586-6600 and find out what your options may be.