Consumer Law Pro

Tax Refunds and Bankruptcy

Will You Lose Your Tax Refund if You File Bankruptcy?

Whether the bankruptcy trustee can take a portion of your tax refund depends on several factors.

If you have already spent your refund, the trustee cannot force you to reimburse the bankruptcy estate for the amount of the refund. However,  if you receive a large refund ($2500 or more) and file bankruptcy shortly thereafter, the trustee may ask you what you spent the money on.  In such cases, the trustee may suspect you have some of the proceeds (cash) left over.  You should keep receipts of what you spend the money on. It is usually safe to spend the money on just about anything including necessities, back due rent, auto payments or repairs, home repairs, mortgage payments, cloths, housewares and legal fees. Putting a certain amount into an IRA may be fine but speak to an attorney first. In most cases, the only way you will run into issues is by retaining the money or using it to pay back family or friends or other acquaintances.

All or a portion of the refund may be exempt. Below the line child tax credit and earned income credit are exempt.

If you are receiving a small refund, under $500, the trustee will rarely bother opening a bankruptcy estate unless you have other significant non-exempt assets. Most trustees will not open an estate for less than $1500 of total non-exempt assets.

The above information applies to 2017 tax refunds. What about your 2018 tax refund? If you file in the first half of the year, you will more than likely keep the entire 2018 tax refund. If you wait until August or later, the trustee may take a prorated portion of the refund. For example, if you file at the end of August, the trustee may take 8/12th (2/3). August is the 8th month of the year out of 12 months. It is assumed the debtor has funded 8/12ths of the refund by the end of August. If you find that you need to file in the second half of the year and you usually receive a refund, speak to an attorney regarding how to proceed. There may be a way to avoid losing two-thirds or more of the refund.


United States Trustee program

Colorado General Assembly