Gone are the days where tax refunds are a huge concern for bankruptcy attorneys and their clients in a chapter 7 bankruptcy case. In previous years, often the advice given to clients is to wait until you file your tax returns (if you were going to receive a substantial tax refund), receive the refund, and spend the refund down on necessities prior to filing bankruptcy. Under Oregon exemptions, which we solely had until July 2013, we had limited protection of tax refunds in a chapter 7 bankruptcy case.
HOWEVER, this is not the case any longer now that we have Federal Exemptions in place. We can protect most if not all tax refunds due a debtor at the time of filing. The Federal Exemption for the wild card exemption (or exemption that can be applied to anything) amounts to: $1,224 plus up to $11,500 of any unused homestead exemption per person. This translates to protecting up to $25,448 of any asset for a married couple who file bankruptcy, including substantial tax refunds.
Because of the new Federal Exemptions, tax refunds for most people will remain intact, and most people will not need to wait until after they receive their tax refund and spend it down in order to file bankruptcy.
A chapter 13 bankruptcy case, however, is a bit different. This is a reorganization of your debt, where monthly payments are made for 3-5 years. Retaining a tax refund is very fact specific.
If you have questions about how property can be protected, including any tax refunds, during bankruptcy, please call for a free consultation.