Tax time is quickly approaching, and a lot of you are probably on the ball and getting your returns prepared. It is highly possible that because of mortgage interest paid, child deductions, or owning energy efficient appliances, your tax preparer has given you the wonderful news that you are getting a sizable tax refund this year! Think of all the things that you can spend that refund on…
But, slow down just one second. If you have decided to also file for bankruptcy, getting that refund is a bittersweet gift, as it will most likely become part of your bankruptcy estate when you file. In a Chapter 7 bankruptcy, you have a trustee assigned to your case. It is the job of the case trustee to review all of your assets and determine if there is anything available for liquidation and distribution to your creditors. Now, the trustee is limited in what he/she can liquidate. The only available assets are those that are non-exempt assets, as determined by your state’s exemption laws. In Arizona, a liquidated debt owed to you, like an outstanding tax refund, is non-exempt property (Arizona exemptions are found in the Arizona revised statutes). If it has not been paid out by the time you file bankruptcy, the mean bankruptcy trustee will snatch that big check right up and pay your debts with it. This applies to all refunds from the years prior to your bankruptcy filing and the year of your filing, not for the years after. So, if you are in a rush to file bankruptcy your refund blessing can quickly become a burden.
However, there is some light at the end of the tunnel. If you are able to wait to file bankruptcy, so that you can receive your refund and spend it, that check is yours. In this case, though, you will have to be careful of how you spend your check. No boat, flat screen, or Rolex purchases please. Necessity items only. Now, a necessity can be clothing, home repairs, even a vehicle (if you are without one and desperately need transportation). It can even be mortgage payments if you are behind or want to pay a month in advance to give yourself a cushion. Whatever you do with the check, you will also need to keep receipts and an accounting of where the money went. Because you can bet that if you spend what could have been his/hers, your case trustee will want you to account for every penny of that refund.
