Can I Keep My Tax Refund If I File for Bankruptcy?

Tax season brings a welcome boost for many Georgia families. But if you are considering bankruptcy—or have already filed—you may be wondering whether you will get to keep your tax refund. The answer depends on the type of bankruptcy you file, when you file, and whether your refund can be protected under Georgia’s bankruptcy exemptions.

Your Tax Refund Is Considered an Asset

In the eyes of the bankruptcy court, a tax refund is not simply a bonus from the government. It represents income that you earned during the prior year but overpaid in taxes. Because of this, the court treats it as an asset—one that may be used to repay your creditors. This is true whether you have already received the refund, are waiting on it, or have not yet filed your tax return.

When you complete your bankruptcy petition, you are required to disclose any tax refund you have received or expect to receive. The Chapter 7 trustee assigned to your case will almost certainly ask about your refund at the meeting of creditors. Being upfront about it is essential—attempting to hide a refund or failing to disclose it can create serious problems for your case.

Tax Refunds in Chapter 7 Bankruptcy

In a Chapter 7 case, a tax refund for income earned before your filing date is considered property of the bankruptcy estate. This means the trustee has the authority to claim the refund and distribute it to your creditors. However, there are important nuances.

If you file bankruptcy partway through the tax year, the trustee is generally entitled only to the portion of the refund attributable to income earned before the filing date. For example, if you filed bankruptcy on July 1, the trustee could potentially claim roughly half of your annual refund, since half of the tax year had elapsed at the time of filing.

If you have already received your refund and spent it on necessary living expenses—such as rent, utilities, groceries, or medical bills—before filing, those funds are typically no longer available for the trustee to claim. However, spending a refund on luxury purchases or paying back loans to friends and family members right before filing can raise red flags and potentially jeopardize your case.

Tax Refunds in Chapter 13 Bankruptcy

In Chapter 13, the rules work a little differently. Because Chapter 13 involves a three-to-five-year repayment plan, the court and the trustee take a broader view of your income. Tax refunds received during the life of your repayment plan are generally considered disposable income, which means the trustee may require you to turn them over to fund your plan.

Some Chapter 13 trustees require debtors to submit their tax refunds each year as a matter of course, while others only require turnover of refunds above a certain threshold. The specific policy can vary, so it is important to discuss this with your attorney when developing your repayment plan.

It is also worth noting that while you are in an active Chapter 13 bankruptcy, you cannot take out a rapid refund or refund anticipation loan. These products are considered new debt, and incurring new debt without court approval while in Chapter 13 is prohibited.

Strategies to Protect Your Tax Refund

While there is no guaranteed way to shield your entire refund from the bankruptcy process, several legitimate strategies can help you keep more of it:

• Adjust your withholding. One of the simplest approaches is to adjust your W-4 so that less tax is withheld from your paycheck throughout the year. A smaller refund means less for the trustee to claim. You will have more money in each paycheck instead.
• Spend the refund on necessities before filing. If you receive your refund before you file, using it for legitimate necessary expenses—rent, car repairs, medical bills, utility catch-up payments—is generally permissible. Keep receipts and records of how the money was spent.
• Use Georgia’s bankruptcy exemptions. Georgia allows debtors to protect certain assets using state exemptions. The wildcard exemption allows you to protect up to $1,200 of any property, plus up to $10,000 of unused homestead exemption can be applied to protect additional assets such as a tax refund. An experienced bankruptcy attorney can help you determine which exemptions apply to your situation.
• Time your filing strategically. The timing of your bankruptcy filing relative to when you receive your refund can make a significant difference. Filing after you have received and responsibly spent your refund is one of the most common strategies attorneys use to protect clients’ interests.

Georgia Surplus Tax Refunds

In recent years, Georgia has issued surplus tax refunds to eligible taxpayers as part of the state’s budget surplus. These refunds—which have ranged from $250 to $500 depending on filing status—are treated similarly to regular tax refunds in bankruptcy. If you are in an active bankruptcy case when a surplus refund is issued, it may be subject to the same rules regarding disclosure and turnover. Be sure to discuss any expected state refunds with your attorney.

What You Should Not Do

There are a few things you should avoid when it comes to tax refunds and bankruptcy. Do not hide your refund or fail to disclose it—the trustee will find out, and the consequences can include denial of your discharge. Do not use your refund to pay back friends or family members before filing, as the trustee can recover those payments as preferential transfers. And do not make large luxury purchases with your refund right before filing, as this could be seen as bad faith.

Talk to a Bankruptcy Attorney

Every situation is different, and the best strategy for protecting your tax refund depends on your specific financial circumstances, the chapter of bankruptcy you are filing, and the timing of your case. The attorneys at Rountree Leitman Klein & Geer have extensive experience helping clients in the Atlanta area navigate these decisions. If you are considering bankruptcy and want to understand how your tax refund may be affected, we encourage you to reach out for a consultation.