Part 1 - Is Your Tax Refund Covered by Your Exemptions?
When you file bankruptcy, a bankruptcy trustee is assigned to your case to look for any assets that are not protected by bankruptcy exemptions. In a Chapter 7 bankruptcy, part of this review will include a though examination of your tax return to see if there is any tax refund money that would not be exempt that could be used pay back creditors.
Exemptions are the laws that apply to some of your possessions that keep them from being subject to liquidation in a bankruptcy. Around this time of year, many people are concerned about making sure their tax refund will be protected when they file bankruptcy.
Whether your tax refund will be protected in bankruptcy will depend on two things: the system of exemptions you select and the amount of exemption you have available to protect your tax refund.
In Minnesota, we are fortunate to have our choice of using either a federal or a state system of exemptions. There are advantages two both sets. To determine the best exemptions for you, you should speak with an experienced Minneapolis Chapter 7 bankruptcy attorney.
People using federal exemptions have the benefit of a "wild card" exemption that can apply to miscellaneous assets, including your tax return. Whether there is any wild card exemption available to cover your tax refund will depend on the other personal property that you own.
Tax refunds are not protected for people using Minnesota exemptions. This is often the trade off that people make when they have a home with significant equity in it. Even when this is the case, you may still spend some of your tax refund, provided you do so before you file for bankruptcy and as long as you are spending the refund on reasonable and necessary living expenses.
Source: www.ehow.com, "Can You Keep Your Refund After a Chapter 7 Bankruptcy?" Pamela Parker