New York Bankruptcy Law Firm Protects the Rights of Clients

Rochester Bankruptcy Attorneys Advise Clients Regarding Their Tax Refunds

Whether or not you will lose your IRS tax refund in a bankruptcy generally depends upon two things:

• The timing of your bankruptcy
• The receipt of your refund

In a chapter 7 bankruptcy, the trustee can use the assets you have when you file to pay off your creditors and allow you to keep any assets you receive after filing for bankruptcy, but the handling of a tax refund can be complex because it often involves a process that begins before the bankruptcy filing date and continues afterwards.

When a debtor files for chapter 7 bankruptcy, all his assets become part of the bankruptcy estate, which is controlled by the bankruptcy trustee. Since a tax refund will likely be considered an asset that the trustee can use to pay unsecured creditors, he will probably ask you about a tax refund at your meeting of creditors.

The trustee will typically handle your tax refund in one of the following ways:

• In the year prior to the bankruptcy, unspent tax refunds will be treated like cash and go to the bankruptcy estate.
• In the year of the bankruptcy, a tax refund based on income earned before the bankruptcy filing goes to the estate, although the debtor will be allowed to keep part of the refund to the degree that the refund is based upon income earned after the filing date.
• Regarding the tax year after the bankruptcy filing, the debtor will be allowed to keep the full refund.

Whether a debtor will be allowed to keep his tax refund from income earned before he filed for bankruptcy depends on the timing of the bankruptcy and receipt of the tax refund. In most cases, if you plan ahead you’ll be able to keep your tax refund, or use the money for other expenses.

Contact a New York Bankruptcy Law Firm Today

If you are due a tax refund from the IRS but wonder about the effect your bankruptcy will have on it, New York bankruptcy attorney Robert A. Schwartz has the experience to provide you with competent legal advice. Contact our firm online or call call [custom:phone] to schedule your free initial consultation today.