What happens to my tax refund?

If you are expecting to receive a tax refund, the size of the refund and timing of tax filing should be considered prior to any bankruptcy filing. The legal advice of an experienced bankruptcy lawyer will be important to your decision.

Under Arizona bankruptcy laws, a tax refund is considered an asset that is being held by another party but owed to you. The tax refund is part of the bankruptcy estate and needs to be listed among your assets just as if it is a savings account or investment account.

If you receive the tax refund prior to filing for bankruptcy, the money should be spent on reasonable and necessary expenses such as food and housing. It is also acceptable to use the refund to pay for the bankruptcy costs. If you use the refund to purchase an asset, that asset could be available to the trustee for debt repayment depending on the type of asset you buy and the available exemptions when you complete the bankruptcy paperwork.

Filing for Chapter 7 bankruptcy will have implications for your tax refund in the current year, the following year, or both. If you regularly overpay income tax and receive a refund, you should bring this to the attention of your bankruptcy lawyer.

There are some bankruptcy cases where the debtor’s exempt assets are calculated based on the bankruptcy laws in a different state. In a bankruptcy filing that uses state exemptions other than those of Arizona, some states may have an exemption for your refund. You will want to consult with an Arizona bankruptcy attorney to be certain that you are using the right limits for exempt assets.

To ensure the best outcome when filing for Chapter 7 bankruptcy, advise your bankruptcy attorneys of an anticipated tax refund or recently received tax refund.