Your tax refund is considered an asset of the bankruptcy estate.  Depending upon the date you file, you may have already received your refund or you are expecting a refund. 

 

Refund Received.  If you have not spent your tax refund, the bankruptcy trustee in both a Chapter 7 and Chapter 13 will seek to confiscate it unless you apply one of your exemptions.  Also, if you have spent your tax refund on a frivolous or luxury item, the bankruptcy trustee may also seek to have you pay that amount into the bankruptcy estate. 

 

Refund Expected.  In a Chapter 7, if you have filed your taxes and are expecting a refund at the time you file, the bankruptcy trustee will expect you to pay the full amount into the estate unless you can convince the trustee that you need the money for necessary expenses.  Likewise if you have filed close to the end of the year.  The bankruptcy trustee may hold your bankruptcy open waiting to received the funds, again, unless you can convince the trustee that you need the money for necessary expenses.  The bankruptcy trustee is only entitled to that portion of your refund that applies to the dates before you file.

 

In a Chapter 13, Florida's Middle District of Florida requires that you to apply all “surplus” money toward the plan and tax refunds are considered “surplus” money.  If you incur an emergency such as unexpected health care costs, car repair or replacement of a necessary appliance, you may be able to obtain a modification to the plan which would allow you to keep a tax refund for that particular expense.  If the trustee objects you will need to motion the Court to allow you to keep the tax refund.

 

Exemptions to Apply.  In Florida, you are entitled to a specific exemption for any tax refund so tax refunds are generally not an issue in a Chapter 7 bankruptcy.   Whether or not you will be able to apply the Florida exemption will depend upon whether or not you meet the domicile requirements.  Not all states have a specific exemption for tax refunds and, if required to apply Federal exemptions, you will have to use your wild card exemption.

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Avoid Losing Your Tax Refund Money.  The most effective way of protecting your tax refund if you may not apply the Florida exemption in Chapter 7 or expect to file a Chapter 13 bankruptcy is to adjust your tax withholding before you file so that you do not have a refund.  You need to keep in mind that you may be slightly increasing your monthly income by doing so.  Additionally, timing your bankruptcy so that you are not close to receipt of a tax refund either before or after your bankruptcy may help in a Chapter 7.  If you do receive a tax refund before you file, spend the money on necessary expenses like rent, mortgage, utilities, health care or groceries.