Using a Tax Refund for Bankruptcy

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Using a Tax Refund for Bankruptcy

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If you are struggling to pay your bills, you are likely looking forward to receiving your tax refund from the IRS. However, if that refund will not even make a dent in your debt, you might want to consider other options. Bankruptcy is a successful debt-relief option for many people, and many people use their tax refund as part of the process.

Do Not Lose Your Refund

If you receive a tax refund in the year prior to filing for Chapter 7 bankruptcy, the refund becomes part of your bankruptcy “estate.” This means that the refund might be subject to liquidation by the bankruptcy trustee to pay your priority creditors. However, you do not have to choose between giving up the refund and filing for bankruptcy, as there are other options.

The law provides that funds will not go to the bankruptcy estate if they are spent on necessary purchases or payments. These can include:

  • Rent or mortgage payment
  • Home maintenance or repairs
  • Car payments or repairs
  • Medical care
  • Clothing
  • Food
  • Education

If you spend your refund on such items, you will not have to turn it over to the bankruptcy trustee. You cannot, however, spend it on luxury items, debt repayments, or advance expenses.

One thing that qualifies as a necessary expense is the cost of your bankruptcy case. When you file, you will need to pay court costs and your attorney’s fees. You can use your refund to cover these costs, which allows you to benefit from both your refund and the bankruptcy process at the same time.

Speak with a Bankruptcy Lawyer in Melbourne Today

At Harnage Law, PLLC, we can advise you on the best use of your tax refund and whether bankruptcy is right for you. Contact us online or call 321.549.7886 to discuss your options.

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