So you thought that they would at least let you keep your tax refund if you filed bankruptcy, right? Wrong — not if you filed the wrong kind of bankruptcy, if you lack the exemptions or if you timed it incorrectly. There are normally more than enough exemptions to prevent losing your income taxes in Kentucky if you file a Chapter 7 bankruptcy. But in Indiana from September through May refunds are commonly taken because the exemptions are so small.
Keeping Tax Refunds With Chapter 7
One strategy is to file a Chapter 7 bankruptcy after you have received and spent the tax refund. If you file a Chapter 7 Bankruptcy after you get your tax refund and after you have spent it there is nothing for the trustee to take. Timing can be important. Many states like Kentucky use the Federal exemptions which are so large that it is rare to lose a tax refund in a Kentucky Chapter 7. Several states have exemptions that are even larger than the Federal exemptions.
Keeping Tax Refunds With Chapter 13
In a Chapter 13 you will normally lose your tax refund in all the years that you are paying back if the plan pays less than 100%. The Louisville Bankruptcy Court requires debtors to turn over their refunds. Other Districts have rules that allow Debtors to keep such refunds. The timing of when, where and what type of bankruptcy to file is essential when your bankruptcy involves income tax debt or refunds. Often the best approach is to claim additional exemptions to ensure you don’t have a tax refund.
Timing and planning are everything. This is why you need good legal advice when you file bankruptcy so that it is done properly. You need someone that knows this area of law completely and that will help you to plan this to your best advantage never do this yourself.