Should You Keep You Tax Refund While in Bankruptcy?

Any asset owned must be listed when a person files bankruptcy. This includes the right to receive a tax refund. Will a person filing bankruptcy lose it? No one can answer that question without knowing many other facts.

The threshold question first has nothing to do with a tax refund while in bankruptcy, but rather where a person has lived in the 2 years before filing bankruptcy. If a person has lived in one state for over 2 years then that state’s laws will govern the exemptions available to a person filing bankruptcy. Some states have their own exemption laws and some allow you to choose, like here in Washington, between the Federal or the State exemptions.

If a person does not own any homestead or claim such an exemption here in Washington, then possibly up to $13,900 for a single person or up to $27,800 for a couple may possibly be exempted which is most likely more than any such tax refund! But equity in other assets could possibly affect those amounts. Most persons filing here in Washington without owning any real estate or having any equity in such real estate most likely would keep their tax refund if not received by the time they file a bankruptcy chapter 7 petition. As a result, if you cannot afford to wait for such receipt, speak to an attorney now to discuss what are the advantages and disadvantages of filing now so you can proceed to know the results of whether or not you will keep your 2021 or prior-year tax refunds!

Stimulus payments and the Covid payment are deemed non-estate property also and thus protected from losing. However, that protection could be lost if those funds are commingled with other assets in bank accounts and as such you are advised to keep separate from other monies if considering filing bankruptcy in order to maximize your exemptions as we want to protect all your assets, not just some.