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 To Expect At Your 341 Meeting

What To Expect at Your 341 Meeting in Utah

341 Meeting Instructions

Your section 341 meeting of creditors is approaching, so to help ensure a smooth meeting this video will provide you with instructions relating to that meeting. We’ll cover several things: first, who’s involved; second, what to wear; third, what to bring with you; fourth, how the meeting is conducted; and fifth, what happens after the meeting. So let’s get started.

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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

When Can I Buy A Home After Bankruptcy

When Can I Buy A Home After Bankruptcy and Foreclosure?

I was speaking with a friend the other day who about a year ago short sold a home following a job loss and related struggles. She had a short-sale and wanted to know when she could buy a home after bankruptcy and foreclosure or a short sale. Her situation is very common. She short sold her home following a job loss and nearly two years of negotiations with her mortgage lender. During negotiations of the short sale the loan was transferred (which led to the first buyer walking away) and numerous lost documents by the lender. Read more

Should I Sign A Reaffirmation Agreement

What Is a Reaffirmation Agreement?

A reaffirmation agreement is an agreement by which the debtor agrees to remain personally liable for a debt post-bankruptcy.   A reaffirmation agreement essentially eliminates the benefit of filing for bankruptcy for that one specific debt.  Because reaffirming a debt undermines the most basic benefit of filing for bankruptcy, we generally discourage our clients from signing a reaffirmation agreement, unless required to do so by the lender to keep the property. If you are inclined to sign one, you should seek counsel from an experienced bankruptcy lawyer before entering into a reaffirmation agreement.  Read more

Why Is Bankruptcy A Constitutional Principle?

Ever wondered why is bankruptcy a Constitutional Principle? The United States constitution has only 4,400 words. It is the oldest and shortest written Constitution of any major government in the world. Article 1, Section 8 of the constitution grants Congress the power “To establish…uniform Laws on the subject of Bankruptcies throughout the United States.” The Preamble of the Constitution explains that the purpose of the Constitution is to “form a more perfect union, establish Justice, insure domestic Tranquility, provide for the common defence [sic], promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity…” Considering the paramount import and brevity of the Constitution, it begs the important question: Why did the framers consider bankruptcy a fundamental principle of our union? 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

What Is a Section 341 Meeting of Creditors?

Many of our clients are initially somewhat concerned about the meeting of creditors.  The meeting of creditors need not cause substantial concern. Frequently after the meeting our clients will comment that “it wasn’t as bad as I thought”. 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

Increases to Utah Bankruptcy Exemptions

Keep More Property in Bankruptcy

The Utah legislature amended the Utah bankruptcy exemptions  in 2013.  Bankruptcy exemptions are the laws that protect property from liquidation in bankruptcy.  Since Utah has opted out of the federal bankruptcy exemptions, the Utah amendments means that bankruptcy filers can now keep more property when filing in Utah.  The new exemptions take effect on May 14, 2013. Read more