blog home Bankruptcy Can I Keep My Tax Refund When Filing for Bankruptcy?

Can I Keep My Tax Refund When Filing for Bankruptcy?

By Phoenix Bankruptcy Attorney on April 27, 2024

Filing for Chapter 7 or Chapter 13 bankruptcy in Arizona can be overwhelming. Questions about retaining assets like tax refunds may add to the confusion. Understanding all the implications of filing for bankruptcy is crucial for people facing financial challenges.

You might be able to retain some or all of your tax refund depending on the type of bankruptcy you choose and how your plan is structured. You may also be able to minimize your losses by adjusting your tax withholding level. There are serious legal issues involved, and you will want to speak with an experienced bankruptcy attorney before making any decisions related to your tax refund.

What Is Chapter 7 Bankruptcy in Arizona?

Chapter 7 bankruptcy, often referred to as liquidation bankruptcy, is a legal process designed to help people in Arizona and across the country eliminate unsecured debts. When you file under Chapter 7, a trustee is appointed to oversee your case. This trustee evaluates your assets and determines if any of them can be sold to pay off creditors. Most personal property is exempt from this process, allowing you to keep many essential items depending on their worth.

Unlike Chapter 13, Chapter 7 bankruptcy doesn’t require a repayment plan. Instead, it offers a relatively quick resolution, usually within three to six months, leading to the discharge of many types of debt. However, it’s important to remember that not all debts can be wiped out in Chapter 7. For example, alimony, child support, certain taxes, and student loans often remain.

Filing for Chapter 7 bankruptcy in Arizona has immediate and long-term effects. As soon as you file, an automatic stay goes into effect, halting most creditors’ attempts to collect debts from you. This stay can provide relief from harassing calls and letters and prevent wage garnishment and utility shutoffs.

How Chapter 7 Bankruptcy Affects Your Tax Refund

A common concern for those filing for Chapter 7 bankruptcy in Arizona is whether you can keep your tax refund. The answer depends on the details of your bankruptcy plan. Your tax refund may be considered an asset in bankruptcy, which can make it subject to seizure by the bankruptcy trustee to pay off creditors. It’s advisable to consult with a bankruptcy lawyer to best understand how to protect your tax refund.

Arizona law provides specific exemptions that may protect your tax refund, but these are limited. For example, earned income tax credits (EITC) are exempt, meaning they cannot be taken by the bankruptcy trustee. However, the non-EITC portion of your tax refund may not be protected by exemptions.

Strategic timing can be important. If you receive and appropriately spend your tax refund before filing for bankruptcy, you may be able to avoid losing it. But this must be done carefully, as your expenditures can be scrutinized or challenged by the trustee. If you choose this route, you’ll want to spend the refund on necessities such as food, clothing, utilities, and mortgage payments.

If you are considering filing for Chapter 7 bankruptcy in Arizona and expecting a tax refund, there are strategies you can employ to protect that refund. You may be able to adjust your withholdings to reduce your refund amount. That way, you receive more of your income throughout the year rather than as a lump sum that could be claimed by the bankruptcy trustee.

What Is Chapter 13 Bankruptcy in Arizona?

Chapter 13 bankruptcy, often referred to as a wage earner’s plan, allows people with a regular income to develop a strategy to repay all or part of their debts. Unlike Chapter 7, which liquidates assets, Chapter 13 focuses on debt reorganization and repayment over three to five years. Debtors propose a repayment plan to make installments to creditors using their future income.

Filing for Chapter 13 bankruptcy requires court approval. This type of bankruptcy provides a framework for repaying debts while also allowing you to keep your property, including your home, which might otherwise be at risk of foreclosure. For many people in Arizona, Chapter 13 offers a path to financial recovery that aligns with your ability to pay rather than liquidate your assets.

How Chapter 13 Bankruptcy Affects Your Tax Refund

Tax refunds in a Chapter 13 bankruptcy hold significant importance as they can impact your repayment plan. In Arizona, tax refunds are considered part of your disposable income, which is the income that’s available to pay your creditors.

When you receive a tax refund during your Chapter 13 plan, the bankruptcy trustee may view this as additional income that should be used to pay off your debts. That’s why your plan may need to include provisions for how tax refunds will be handled. Your ability to keep your tax refund can vary based on your specific circumstances and the details of your repayment plan.

An experienced Phoenix bankruptcy attorney will assist you in determining how your tax refunds will be treated. They will also help you create a plan that considers the potential adjustments to your financial outlook during your Chapter 13 bankruptcy process.

Gain Financial Independence with Our Phoenix Bankruptcy Lawyer

If you’re looking for the best solution to your debt problems, finding the right bankruptcy attorney can make all the difference. Cy T. Hainey of Hilltop Law Firm will review your options and walk you through the bankruptcy process.

Cy has nearly a decade of experience in bankruptcy law and is a trusted advocate for your financial interests.

For compassionate guidance and exceptional representation in Chapter 13 or Chapter 7 bankruptcy, get in contact with a Phoenix bankruptcy lawyer at Hilltop Law Firm by calling (602) 466-9631 today.

Posted in: Bankruptcy

“Settled my debt quickly and for less than I could have imagined! I would definitely recommend Cy Hainey!”
- Chelsea