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Now that tax season is approaching, can I lose my income tax refund in a bankruptcy filing?

When someone makes the decision to file for bankruptcy, timing is everything. After the new year begins, many people feel buyer’s remorse for their vacation spending frenzy and decide they need to file for bankruptcy for their New Years resolution. This happens almost every year after reality sets in and there is simply not enough money to make ends meet. What these folks don’t think about is that tax season is coming quickly after the new year and those who trust their tax return like pennies from heaven will generally not think about it before filing for bankruptcy. That is why it is a good idea to cover all the bases and ask the question, can I lose my income tax refund and filing for bankruptcy?

The simple answer to that question is yes. That is why it is important that a bankruptcy attorney help the person file the application. A bankruptcy attorney will know when to petition to protect your income tax refund if necessary. Any income becomes part of the bankruptcy estate when you file for bankruptcy. In fact, the trustee will generally look back six months and the money received during this time will be considered income. Worse yet, a big fat government check that is not protected by bankruptcy exemption laws is fair game for the bankruptcy administrator to use to pay off creditors. When filing Chapter 7, the bankruptcy attorney will examine all cash, savings, and any other assets that can be easily liquidated and protect those who use the bankruptcy exemption laws. Where there is a problem is when a person does not think about an income tax refund that is on its way from the federal or state government and the bankruptcy administrator finds it. If the lawyer is not aware of it, he will most likely be left unprotected and swallowed it.

This is why it is really important to make sure that a person has a lawyer they trust and feel comfortable sharing intimate financial details. Holding me is not an option. Trying to hide a credit card or property aside will only end up being disastrous in a bankruptcy filing. In this technology-driven world of bankruptcy, trustees have many tools in their bag of tricks to obtain information about the person filing for bankruptcy. The last thing an individual wants to hear at the 341 meeting is that the trustee found some property or income that was not disclosed. The lawyer will have eggs in the face as well as the debtor and will begin the excavation.

Just because someone is planning to get their tax money back doesn’t mean they shouldn’t file bankruptcy just yet if they absolutely have to. Most states allow generous exemptions to protect a good amount of property, including a wildcard exemption that can be used for anything, including an income tax refund check. As the economy gets tighter, most people count on this annual refund as kind of crazy or frugal money, just a way to stay a little more comfortable for a few months. The amount of these checks in the coming years will likely decrease as the Affordable Care Act takes effect. It will cost every American more money to help pay for health care and leave less to pay back at the end of the year. The bottom line is, if someone needs to file bankruptcy, go ahead. They should speak to a bankruptcy attorney and be totally honest about any potential windfall gains they may have in the future so that the attorney can plan accordingly and even postpone filing the petition if necessary.

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