Use Tax Refund to pay for Bankruptcy

Every year around tax season our clients ask us how bankruptcy will impact the tax refund they are expecting. Some of the questions posed include: Can I spend my tax refund before filing? Can I use my tax refund to pay for the costs of bankruptcy? Should I file bankruptcy before receiving my tax refund? These are all great questions and we will address them here.

The Impact on Taxes Depends on Which Chapter of Bankruptcy

At the outset, we need to clarify that bankruptcy potentially impacts tax refunds differently depending on which chapter of bankruptcy is at issue. In chapter 13 cases, the debtor is generally required to contribute all of their “disposable income” to repay creditors within the plan’s term. This generally requires the debtor to contribute their tax refunds to their chapter 13 plan, although there are some limitations that in many cases allow the debtor to keep some or all of their tax refunds.

Chapter 7 cases are liquidations, which requires the debtor to surrender or “liquidate” any property that is not exempt under Utah’s exemptions. Tax refunds are not exempt. This means that the trustee has a right to any tax refunds that were owed at the time the bankruptcy case was filed–even if the taxes have not been filed and won’t be filed for sometime (as in mid year). This also includes tax refunds that have been received and spent, unless the funds were used for a property purpose. A proper purpose is an expense that is exempt. For example, there is a $3,000 exemption in equity for one vehicle per filer. So you could use $3,000 of your tax refund before you file bankruptcy to purchase a vehicle, if you don’t already own one with equity.

Should I File Bankruptcy Before or After Receiving a Tax Refund?

The timing of filing bankruptcy can be a delicate issue when a tax refund is expected–depending on the time of year. Our generally recommendation at the beginning of a new year, in chapter 7 cases, is to wait to file bankruptcy until after you receive the tax refund and the refunds are already spent on expenses that will not cause additional problems.

How the refund is used is as important an issue as the timing of filing. If you use tax refunds for non-exempt purchases or some other expenses, then you could be required to pay in the tax refunds…even if the money has already been spent! Some examples of expenditures that cause problems include: repaying family members for friends for money they’ve lent to you, family trips, and pre-paying rent. This of course is only a partial list. The best advise we can give is to meet with an experienced and competent bankruptcy attorney BEFORE spending the tax refund to ensure your planned use of the refund won’t cause complications to your bankruptcy case.

Can I Use My Tax Refund To Pay For the Costs of Bankruptcy?

The attorney’s fees and other costs associated with filing bankruptcy are not exempt, so will using them to pay for bankruptcy cause a problem or require me to repay that amount to the trustee? The short answer to this question is using the tax refund to pay for bankruptcy generally will not cause a problem and is one of the best ways to use the refund before filing, to avoid losing the refund.

What Happens to Rental Property in Bankruptcy


One of the most important concerns many of our clients have is how bankruptcy will impact their lease on an apartment of home.  This concern arises in one of two scenarios: (1) the client-debtor has arrearages and is filing bankruptcy, at least in part, to avoid paying the past-due rent and perhaps avoid immediate eviction; 0r (2) the client-debtor is current and wants stay in the property. We’ll address each scenario in this article. Read more

What Happens After You File Chapter 13?

Once a chapter 13 bankruptcy case is filed, the automatic stay prevents creditors from legally foreclosing, garnishing, repossessing or collecting against the debtor or any individual joint debtors. As part of the chapter 13 filing, the debtor proposes a chapter 13 plan (“Plan”) to reorganize their finances.  The Plan will contain provisions to deal with repaying secured debts, taxes and other priority debt. It will also propose a plan to bring leases or secured accounts like car loans and mortgages current, removing judgment liens, and restructuring interest rates and amounts due on secured loans.  To ensure success of the Plan, the Debtor must comply with the Plan’s terms and remain current. Read more

Are Federal or State Taxes Dischargeable in Bankruptcy?

One of the most frequently asked questions that we hear in our Utah bankruptcy practice is whether taxes can be discharged in bankruptcy. The answer to such a seemingly simple question is actually quite complicated. Some federal and state income taxes may be eligible for discharge under Chapter 7 or Chapter 13 of the bankruptcy code under certain circumstances. Read more

Can I File Bankruptcy Without My Spouse?

Frequently clients need to file for bankruptcy, but want to do so without his or her spouse being affected.  That raises the questions: Can a married person file bankruptcy alone? How is the non-filing spouse impacted when their spouse files bankruptcy alone? Read more

What is Chapter 13 “Cram-down”?

Chapter 13 bankruptcy in Utah County is a consolidation of debt and a partial repayment over a period of three to five years, based on the debtor’s ability to pay. Sections 1322 and 506 of the bankruptcy code permits bankruptcy courts to reduce the balance or “cram-down” unsecured debt. This essentially converts property that is secured (collateral is attached to the loan like a home, automobile, or other property) to unsecured debt.  Because unsecured debt is paid last in a chapter 13 plan, this often means the creditor receives little or no payout during the chapter 13 plan for the unsecured portion.  Debts that are not fully repaid during the chapter 13 plan are then discharged. Read more

Stop the Student Loan Debt Bomb with A Bankruptcy Amendment

All Americans have felt the worst economic downturn in American history, since the Great Depression.  The affects and repercussions are still being diagnosed, assessed and measured.  The damage induced by the Wall Street housing bubble is far more widespread than a weak housing market, negative equity, or high unemployment rates. Read more

Stop The Decline of Home-Ownership: A Bankruptcy Amendment Needed

Since 2008 the U.S. real estate market has dogged our economic stability. The so-called Great Recession was largely caused by failed exotic mortgages fueled by mortgage-backed securities that created a false value of real estate. Years later, Americans continue to struggle with the resultant negative equity in their homes. Due to foreclosures of many of these doomed properties, home ownership is now the lowest since the great depression. The current low percentage of home-ownership should sound an alarm to American society. Home-ownership, after all, is the bedrock of the American Dream and fuels our economic stability. Yet, the current bankruptcy code is designed to further erode home-ownership.

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