It’s that time of the year again, and one of the most often overlooked aspects of a prospective bankruptcy filer’s financial picture is the tax return that is expected but not yet received. It is a common misperception that, when you file for chapter 7 bankruptcy, the bankruptcy trustee and court are concerned only about the past and the present state of your financial affairs. In fact, in many ways, they are just as concerned with future alterations to your finances.
An annual tax-return is often the largest unscheduled influx of cash that a consumer receives all year long, so it is of particular interest to trustees. From the end of a year, around late November to December, through March or April of the subsequent year, the possibility that a debtor filing for bankruptcy may receive a large check from the government is something that all parties need to keep in mind. For those of you considering filing for bankruptcy, especially now, it is important to include the amount of money you expect to receive in your tax-return in the disclosures you make to the bankruptcy attorney preparing your petition.
Remember to include your expected tax refund in your discussions with your attorney because it is especially important because, often, there may be steps the attorney can take to prevent the inclusion of the full refund in the chapter 7 bankruptcy estate which is overseen by the bankruptcy trustee. For example, if the refund is produced by excessive tax withholding throughout the tax year, the refund may be prorated over the course of the year with only the pre-petition portion being included in the estate. Issues also arise with regard to the tax refund in joint bankruptcy petitions (petitions for bankruptcy from a married couple). Certain tax credits may also be treated differently than others in the petition. The timing of the petition’s filing may also determine whether the refund is included in the estate at all, furthermore.
In short, as with all aspects of bankruptcy, the treatment of an expected tax refund is a complicated matter and should be discussed with a bankruptcy attorney. Many people rely on that tax return to get a jump on the new year, and losing it to a bankruptcy trustee due to an ill-time petition filing or other misstep is a major blow. The possibility is, however, a needless risk. Good planning with a bankruptcy attorney and, most importantly, full disclosure of your entire financial picture, including your future financial picture, will easily mitigate such risks.
If you are considering filing for bankruptcy and are concerned about the impact it may have on your ability to retain your tax refund or about the impact your tax refund may have on your ability to file bankruptcy in the first place, please contact the Law offices of Chirnese L. Liverpool at (818) 714-2200 to schedule a free, initial consultation.