Tax time can be a great time or a stressful one, depending on your financial and tax situation. On average most Americans received a tax refund of about $3,000, but many paid much more than this amount in during the tax year in question. What happens if you file for bankruptcy and then receive a big tax refund? What if you receive the refund before you file for bankruptcy? Does this change anything or do the same laws and rules apply in both situations?
If you are unsure how a tax refund will affect you, either before or during bankruptcy proceedings, then this should be discussed with an experienced bankruptcy attorney who thoroughly understands the bankruptcy laws and reporting requirements. Usually when you file for bankruptcy protection you will need to disclose all money that has been received within the last 6 months, as well as a minimum of 2 years of tax returns for the most recent years before filing.
If you receive a tax refund in the 6 month period prior to filing for bankruptcy this will need to be disclosed in the bankruptcy forms. Failing to disclose this refund could cause your case to be dismissed, or you could even face criminal charges for bankruptcy fraud in certain situations. Since the bankruptcy court will verify the tax information you provide you will usually be caught if you do not disclose all money received in the 6 months before filing the bankruptcy petition. You should always be honest and as accurate as possible when filling out the bankruptcy forms. This will ensure that your case goes as expected and there are no problems.
Using an experienced bankruptcy attorney can help you avoid many common mistakes, and help you get the results that you want and the financial and debt relief that you need. If you will receive the tax refund after you have filed the bankruptcy petition then this may need to be reported. In either case if the refund was used for necessities then it may not affect the case outcome. If you have a chapter 13 case then the refund may need to be reported and may be used by the court to help pay down the debts that you owe.
A qualified bankruptcy lawyer can help you evaluate how a tax refund will affect your case. Sometimes the attorney may recommend a delay before filing, or you may be advised to use the refund to pay down some of the debts owed. Often the tax refund is a result of paying too much during the year, and the bankruptcy lawyer may recommend adjusting the withholding allowances that you have chosen to minimize any over payments.
When you pay too much in taxes you are providing an interest free loan to the federal government, and in most cases this money can be better spend in other areas instead. You may want to have a tax professional or accountant go over your tax information and make recommendations on any changes that are needed to prevent paying too much during the year.