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Protecting Your Tax Refund If You Haven’t Filed For Bankruptcy Yet

Posted on Wednesday (January 27, 2010) at 2:30 am to Bankruptcy Exemptions
Bankruptcy Tips Consumers Should Know
Chapter 7 Bankruptcy
Tax and Bankruptcy Issues

New York tax refunds and filing for bankruptcy:  LongIslandBankruptcyBlog.com

Written by Craig D. Robins, Esq.
This post is the fourth in a series of articles that I’ve writtten this week addressing every aspect you will need to know about filing bankruptcy, protecting tax refunds, and related issues.  Links to all posts in this series are at the bottom of the page.
What Should You Do If You Expect a Large Tax Refund, But Haven’t Filed the Bankruptcy Petition Yet?
TIP:  Here’s where pre-bankruptcy planning becomes very important.  If you expect a large refund, you may want to delay the filing of your bankruptcy petition until you receive the refund and spend it down in an appropriate manner.
Using a large tax refund to pay your rent or mortgage, buy food, make a car payment, or even pay your bankruptcy attorney, are all types of payments that are consistent with filing for bankruptcy in good faith.  Sometimes the refund can also be used to buy necessary clothing or furniture, fix your house, repair your car, or get necessary dental work done.
However, you cannot pay existing debts to friends or relatives, give the money away, gamble it away, or buy luxury goods.  In general, using it to pay any reasonable and necessary expenses is O.K.
Since pre-bankruptcy planning can be tricky in order to do it in a way that complies with the bankruptcy law, it is always best to seek the advice of a competent bankruptcy attorney before doing so.
Exempting the Tax Refund in the Bankruptcy Petition
If you need to file your bankruptcy petition before you recieve the refund, you must list it in the petition.
To protect your tax refund, you must exempt it by including it as an asset in the Schedule B, which is the Schedule of Personal Property, by stating the anticipated amounts of both the Federal and State refunds, and by listing the exemption and the correct exemption statute (New York C.P.L.R. section 5206) in Schedule C to the petition, which is the Schedule of Exemptions. 
If you have to file your bankruptcy petition before preparing your tax return, then you will not know the amount of your refund (which is fairly common because most people don’t do prepare their tax returns until April).  In such situations, you should nevertheless list it as “possible income tax refund for the 2009 tax year. . . . Amount $ – unknown -“
You May Be Able to Keep a Non-Exempt Tax Refund If It Is Small
Generally, trustees will only administer non-exempt assets if it is reasonable to do so.  If the tax return is relatively small, it will probably be administratively inconvenient for the trustee to be burdened with all of the work necessary to distribute a very small amount.
I previously wrote a post about the issues a Chapter 7 trustee considers in deciding whether to take a debtor’s money or assets to distribute to creditors:  Sometimes Debtors Can Keep Non-Exempt Assets in Chapter 7 Bankruptcy Cases .
Quick Links to All Tax Week Blog Posts About Tax Refunds and Bankruptcy:
Informative Article About Eliminating Taxes in Bankruptcy:
Article About Tax Consequences and Bankruptcy:
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Craig D. Robins, Esq. is a Long Island bankruptcy lawyer, who is focused primarily on helping individuals and families, find solutions to their debt problems. Read more »


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Craig D. Robins, Esq.
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