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Every year, we  file our taxes with the Internal Revenue Service and for those receiving a refund, it is a welcome source of funds to catch up on winter bills, holiday debt and/or deferred car and house repairs.   While nobody looks forward to filing bankruptcy; however, bankruptcy can provide a permanent solution to overwhelming debt.   But if the refund is not going to be enough to keep you from bankruptcy, YOU MUST BE CAREFUL AND BE CAREFUL OF WHEN YOU FILE YOUR CASE.   

Tax Refunds are not safe in Indiana Bankruptcy

A tax refund owed to you by the State of Indiana or the Internal Revenue Service is not protected from the Chapter 7 Trustee when you file bankruptcy.  The bankruptcy trustee will require that you give him the check. The tax refund is pro-rated based on the days that have passed in the year (as of the date of filing)/365(6) days.  This portion belongs to the bankruptcy estate.  Against that amount, you may take your Indiana State Exemptions.   A failure to cooperate with the Chapter 7  Trustee in turning over the bankruptcy estate''s share may cause your discharge to be revoked.


The key element in protecting your tax refund and timing your bankruptcy petition filing starts with the question "Have you received the tax refund?" prior to filing. If you have not received it  and you file bankruptcy, it  becomes part of the bankruptcy estate.  This means that to the extent the Indiana exemptions do not protect it, the Chapter 7 Trustee can take your tax refund (or a portion of it) to pay your creditors.  Protect your tax refund by planning when you will file Chapter 7 bankruptcy.


1.   Delay the filing of  your bankruptcy until after you have received the tax refund.   Usually, you don't have to file immediately.   With a free consultion, our office can estimate what your tax refund amount will be.  That way, you can determine if you want to utilize your tax refund for car repairs, house repairs, catch up on secured debt or other appropriate expenses.  Some people use the refund to even pay for their bankruptcy.   But use it.  That way, it won’t be owed to you when you file your case and it will not be some unprotected asset, cash.   In your free consultation, we can advise of the appropriate expenditures that the Chapter 7 trustee cannot challenge.  Then, the Chapter 7 trustee will not be able to require that you hand over that money.   Of course, not everybody listens to our advice and the result can be if the refund  is still owed to you or is not spent, then you will have to turn the refund over to the Chapter 7 Trustee.    Unfortunately, the refund or cash is not one of the things that the law allows you to protect very well. When Congress wrote the bankruptcy code it allowed each state to create a list of things that cannot be taken by bankruptcy trustees or creditors. These laws are called exemptions. The items on the list are “exempt” from being taken by a creditor or bankruptcy trustee.  Indiana’s list of exemptions does not allow you to protect your tax refund to any great extent.

2.   Spend your refund first before you file your bankruptcy.   As stated above, there are appropriate things on which you can spend your tax refund: Car repairs, house repairs, catch up on secured debt or other appropriate expenses.  It must be spent.  That way, it won’t be owed to you when you file your case and it will not be some unprotected asset, cash.   In your free consultation, we can advise of the appropriate expenditures that the Chapter 7 trustee cannot challenge.  Many people even use tax refunds to pay for the bankruptcy.

3.  Do not use the money  to pay debts.   This is one of the do's and don'ts of getting ready to file bankruptcy.  The money used to pay a debt before filing bankruptcy can be collected from the person you paid it to by the bankruptcy trustee. One of the worse things a tax refund could be used for is to repay a family member. If you are not able to settle the matter, the trustee has a right to sue your family member to get the money back.  For more information, read this.

4.   Reduce your refund by changing your withholdings.  If you normally get big tax refunds and you are thinking ahead, this is a way you can get the benefit of those dollars now on those essential expenses (obviously not credit cards).   This will lower the portion of tax refund that the Chapter 7 Trustee is entitled to administer; maybe so much that it just is not worth his or her time.


Get Trusted, Experienced Bankruptcy Counsel Today

Applying decades of experience,  Indianapolis bankruptcy attorney Steven Taylor will assess your financial situation and hear you out on your goals.  To discuss your immediate concerns and long-term financial challenges, request a free telephone consultation with Steven Taylor today.  He can help you find the best solution and take decisive action to regain your financial foothold.

Steven P. Taylor, P.C. - Kokomo | Indianapolis Chapter  7 Bankruptcy Lawyer

Contact the law firm of Steven P. Taylor, P.C. today at (317) 271-1111 for a free consultation in his Indianapolis bankruptcy office or call (765) 868-0807 for an appointment in the Kokomo bankrupcy office about how you can protect your tax refund if you file a Chapter 7 bankruptcy in Indianapolis or Kokomo  or email us your questions.  Steven P. Taylor will assist you in determining whether a Chapter 7 bankruptcy is the best path for you, and will guide you through the bankruptcy process

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