For many, obtaining a tax refund can be helpful, especially when you’re in debt and struggling to make ends meet. However, in the event that you decide filing for bankruptcy is in your best interest, it’s important to understand what you can expect to happen to these funds. The following blog explores what you should know about these matters, including how these funds are handled in the different chapters and the importance of working with Franklin County bankruptcy lawyers to help you when you’re ready to file.
What Happens to My Tax Refund During Bankruptcy in Ohio?
Generally, when you file for bankruptcy, your tax refund will be considered part of your bankruptcy estate. However, the type of bankruptcy chapter you file will determine exactly what you can expect.
During Chapter 7, non-exempt property is subject to seizure and liquidation to repay creditors. However, the portion of funds that covers the period before you filed for bankruptcy can be seized, but you may be able to keep the portion of funds you accrued after you declared bankruptcy. In so
During Chapter 13, which is a repayment plan that will last three to five years, you’ll find that your tax refund will be considered part of your disposable income. As such, it will be factored into toward your payment plan, as your trustee will required you to submit the funds. In some circumstances, you may be granted the opportunity to keep your tax returns for necessary expenses like medical bills or other unexpected emergencies. In these isntances, your attorney can help you file a refund retention motion which gives you the opportunity to justify keeping the funds.
Can I Spend My Return Before Filing?
It’s important to understand that if you get your tax refund back before you declare bankruptcy, you must be careful in how you spend the money. Unfortunately, you’ll find that spending the funds on anything other than basic necessities can result in legal trouble.
In the event you use the return money to repay a loan taken out from a friend or family member, it can be viewed as a preferential payment. This is because it gives one creditor an advantage over the others. If this occurs, the bankruptcy court can actually “claw back” payments made within one year of filing from family members or payments made within 90 days from non-family members.
However, if you use the money to make a luxury purchase, you may be accused of attempting to commit tax fraud. This is because the court will argue that this is an attempt to misues your assets. Depending on how close you purchased the item, you can be charged with federal tax fraud for this act. In other instances, you may be equired to return the item or reimburse the value of the item you stole to the bankruptcy estate.
Generally, the only things you should spend your tax refund on before filing for bankruptcy are your necessary living expenses. This includes medical care, groceries, rent, utilities, or car repairs that are necessary for you to get to and from work.
As you can see, there are several elements that can affect your tax refund, which is why navigating this process with the assistance of an experienced bankruptcy attorney is in your best interest. At Arnold Law Firm, we understand how complicated these matters can be, which is why we will do everything possible to help you through these times. Contact us today to learn more.
