Keeping Your Tax Refund Protected in a Chapter 7 Bankruptcy

Part 2 - Spending Down Your Tax Refund

If the full amount off your tax refund will not be covered by your exemptions, you may want to consider spending down your tax refund before you file for bankruptcy. For a lot of individuals, whether they spend their tax refunds has less to do with choice than with necessity. Many people are not concerned about holding onto their tax refund. Some people depend on that money to pay for property taxes or other necessary living expenses.

Although it is permissible to spend your tax refund on necessary living expenses, there are a few rules that every filer should live by. The following are a list of expenses generally considered reasonable and necessary:

  • Current mortgage or rent payment
  • Current car payment
  • Current home owners association (HOA) dues
  • Food
  • Utilities
  • Clothing
  • Car repairs, gasoline and maintenance
  • Medical and dental expenses
  • Insurance

The list is not exhaustive, but more of a guide. You should always speak with your Chapter 7 bankruptcy attorney before spending any of your tax returns to make sure they are reasonable. You will also want to keep receipts and documentation for how you spent your tax refunds so you will have them available if the trustee requests proof for how you spent your refund.

There are also things that you should never do with your tax return money. The most important is to make sure you do not pay back any friends or relatives. Friends or relatives may be anxious to be repaid the money that they are owed, but it is absolutely critical that you do not pay them back.

Paying back friends or family members is considered a preferential transfer and it is prohibited by the bankruptcy code. If you do, the trustee could pursue them to recover the money so it can be distributed to your creditors.

Source:, "Can You Keep Your Refund After a Chapter 7 Bankruptcy?" Pamela Parker

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