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Can You Keep a Tax Refund in Bankruptcy?


With the new year, many people are beginning to think about their income taxes for 2019. For millions of workers, filing by April 15 will result in a tax refund, usually because they contributed more in withholding taxes than they needed or because they can claim exemptions.

If you are planning to file for bankruptcy, you might be curious about what will happen to your refund, in particular whether you can keep it. The good news is that you typically can keep your refund, and our Plantation bankruptcy attorneys explain why below.

Determine when You Earned the Refund

As a first step, you need to figure out whether the refund comes from income you earned before or after you filed for bankruptcy:

  • If the refund comes from income before you filed, then it is probably part of your bankruptcy estate, which is distributed to creditors. It doesn’t matter whether you receive the refund before or after you file.
  • If the refund comes from income after you filed, then it will not be considered part of your bankruptcy estate, and you can keep it.

When a refund is part of a bankruptcy estate, it is treated no differently than cash in a bank account. In theory, the trustee should be able to take it and distribute it to creditors.

Protect Your Refund from Creditors

There is great news for Florida residents. Even if the refund comes from income earned before you filed, you can exempt it from bankruptcy proceedings under Florida law. Fla. Stat. Ann. §222.25(3) exempts from a lawsuit any interest in a refund or credit received or about to be received. This means that, in a Chapter 7 bankruptcy, the trustee will not be able to take your tax refund and give it to creditors.

You might also choose to spend the tax refund on necessary expenses if you receive it before filing. A necessary expense is something like:

  • Rent or mortgage
  • Food
  • Utilities
  • Medical treatment
  • Transportation costs, including car payments
  • Educational expenses
  • Clothing

You want to avoid spending the tax refund on luxury items, like a trip to Vegas. You also shouldn’t try to sign over the refund to a family member or use it to pay down only one of your debts, because these types of transactions are prohibited.

Since the refund is exempt, you might want to keep it in a separate bank account and not mingle it with your other funds. This helps preserve the identity of the refund and prevents the trustee from claiming it is just extra cash you have.

Contact Us with Questions

The intersection of bankruptcy and tax law is complicated, and we advise all members of the public to contact an experienced attorney with questions. Nowack & Olson, PLLC is a leading South Florida bankruptcy firm with over 20,000 satisfied clients. We know this area of law and how to maximize your financial advantage so you can hit the ground running.

For help with your case, please contact us today. You can schedule a free, confidential consultation by calling 888-813-4737.


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