My tax refund – Chapter 7 Bankruptcy Exemption
It is tax season again! Many of us are expecting to receive a tax refund. Tax refunds are often a vital part of your financial plan. Many of us count on the refund to cover unusual expenses, like car and home repairs, getting a new apartment, or car.
A common question becomes, what will happen to my tax refund if I file for chapter 7 bankruptcy? Will I lose my refund?
For most debtor(s) (the person filing bankruptcy) you will keep your refund.
In bankruptcy you are permitted to keep certain property. This is called a property exemption.
Massachusetts has a wild card exemption of up to $6,000.00 per filer. $12,000.00 for debtors filing a joint bankruptcy. See MGL ch. 235 § 34(17).
If you have already received your tax refund, then you no longer need to exempt the refund. But you will likely have money in the bank. You can exempt $5,000.00 in your bank accounts plus the $6,000.00 wild card exemption. See MGL ch. 235 § 34(15) and See MGL ch. 246 §28(A). Remember the numbers are doubled for married couples filing jointly.
Some debtors elect to use federal exemptions. The federal wild card exemption is $15,425.00. See 11 U.S.C. §522(d)(5). Which is doubled for joint filers.
For married individuals filing joint returns, we must also look at the allocation of the refund to each spouse. In In re Trickett, 391 B.R. 657 (Bankr. D. Mass. 2008) the court created an easy solution; each spouse was entitled 50% of the refund. However, that case was later overturned by the Massachusetts Supreme Judicial Court in Hundley v. Marsh, 459 Mass. 78, 944 N.E.2d 127 (2011).
In Hundley v. Marsh the court found that the better approach was to ask what the refund would be to each spouse if they filed separate tax returns.
After all this, for almost all people filing chapter 7 bankruptcy, your tax refund will be protected from turnover to the bankruptcy estate to pay creditors.
It is always best to talk to your lawyer about your financial situation to determine the best course of action.
I am available to you for a free consultation. You may schedule a free consultation online at: www.RKovacsLaw.com/appointments
Robert Kovacs
