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Can I Keep My Tax Refund if I File for Chapter 7 Bankruptcy?

The Bankruptcy law requires the debtor to list in his or her Bankruptcy petition a complete list of all property and property interest(s) owned by the debtor. As such, the debtor is required to not only list all property within his or her possession or control, but to also list any property held by another person or entity, any future interest(s), any unliquidated interest(s), or any contingent interest(s) in property.

A prospective tax refund is, essentially, an overpayment of taxes that is held for you by the federal government until it is refunded back to you at tax time. As such, a prospective tax refund is considered to be property of the Bankruptcy estate, just as if it were a sum of money in your personal checking account.

If you, at the time of filing, are expecting to receive a tax refund, your refund might be protected by a property "exemption." In Illinois, different exemption allowances are available for different types of property. Often, these exemption allowances are sufficient to protect all of the debtor's property, including the debtor's prospective tax refund. However, if the total value of your property (all property, including your tax refund) is greater than the available exemption allowance(s), you can be required to surrender the property that is "non-exempt."

In this second situation, your best option may include one of the following courses of action: (1) file for Bankruptcy relief under Chapter 7 and apply your exemption allowances to protect your tax refund, while designating as non-exempt other property that you don't mind surrendering (whether this option is advisable will depend upon the size of your expected refund as well as the value of your other property); (2) wait a certain period of time before you file the Chapter 7 petition; (3) file for Bankruptcy protection under Chapter 13; (4) utilize some other non-bankruptcy debt-relief option.

If you are considering filing for bankruptcy relief and are expecting to receive a tax refund, the Law Office of Timothy Brown will be glad to advise you of your best options. We have offices in Elgin and Crystal Lake.