Filed for Bankruptcy? Don’t Spend that Tax Refund Yet

Why Federal Tax Refunds Matter in Your Bankruptcy Case

The federal income tax refund is considered to be your property under bankruptcy law - even if you haven't received it yet - which, unfortunately, also means that the bankruptcy trustee will consider this money as an asset in both Chapter 7 and Chapter 13 cases, subject to his or her control and disposition. (See 11 U.C.S. §541(a)(1) and 11 U.S.C. §1306(a)(1).)

Tax Refunds After Filing Chapter 7

If you're facing overwhelming debt, you may choose to file for Chapter 7 bankruptcy, in which case the trustees of the Northern District of Illinois (which includes Cook County and the surrounding collar counties like Will County) can go after the tax refund you expect to receive.

In fact, the trustee can go back as early as October of the year prior to the time you filed your tax return.

For example, if you file for bankruptcy in November 2012, and subsequently file a 2012 federal tax return in February 2013, the trustee can take the 2012 tax refund (which you received in 2013) and possibly use it as an asset for distribution in your past 2012 bankruptcy case. (See In Re Meyers, 616 F.3d 626 (7th Cir. 2010).)

Tax Refunds After Filing Chapter 13

There are three Chapter 13 trustees in the Northern District of Illinois. Any one of these three trustees can require you to surrender your tax refund, although each trustee will consider specific facts before requiring you to pay your entire tax refund (or part of it) into the Chapter 13 plan.

Other Situations

You received (and spent) a tax refund prior to filing for bankruptcy. If you got a tax refund in the recent past and you spent that refund, and you're now filing for bankruptcy, under bankruptcy law the money is no longer considered to be your property. However, the trustee will examine exactly how you spent that refund to ensure it wasn't spent inappropriately (i.e. on a flat-screen TV, rather than for rent and food).

You want to keep your half of the refund when your spouse (but not you) is filing for bankruptcy. In general, your spouse can file for bankruptcy without having to list your property on the paperwork, meaning that you can keep your part of the tax refund. However, if you don't work (but your spouse does), the entire tax refund will be considered as your spouse's property. Thus, the entire refund must be properly listed and protected on the bankruptcy paperwork or it could be taken by the trustee and used to pay the very creditors your spouse wants bankruptcy protection against.