How Does Filing a Chapter 7 Bankruptcy Affect My Tax Refund?

By Tracy L. Hirsch

When a Chapter 7 bankruptcy petition is filed in Kentucky, there is a court appointed trustee assigned to your case. The trustee’s job is to determine if there are any unprotected assets that can be sold or collected in order to distribute funds to creditors in the case.

A tax refund is an asset in a bankruptcy case, regardless of whether the refund has been received or not. Therefore, the refund, or expected refund, is an asset that must be disclosed in the Chapter 7 bankruptcy petition and exempted by any applicable exemption.

Depending on the state the the debtor files the bankruptcy petition in, there may or may not be an available exemption to protect the tax refund or a portion of it.

Both Kentucky and Indiana do, however, provide an unlimited exemption for any portion of the refund that is based upon Earned Income Credit.

All tax refunds must be disclosed in any bankruptcy case, including Chapter 7 and Chapter 13.

In Kentucky, debtors may utilize federal exemptions, which are much more generous than state exemptions when it comes to protecting cash or cash equivalent assets such as tax refunds.

Each individual who files in Kentucky is entitled to claim a $1,225.00 “wildcard” exemption that can protect cash, checking account balances, tax refunds and other miscellaneous assets that are not otherwise covered by an exemption.

In addition to the wildcard exemption, a debtor may use up to $11,500.00 of the unused portion of their homestead exemption. In the case of an individual debtor that does not have equity in any real estate, they could potentially protect cash and other cash equivalents up to $12,725.00.

Indiana follows its own set of state exemptions which are limited when it come to cash and other intangible personal property. An upcoming tax refund is an asset that is dealt with in the same manner as cash on hand or in a checking or savings account.

Based on Indiana exemptions, each debtor may exempt only $350.00 in intangible personal property. Therefore, in the case of an individual debtor that is expecting a significant tax refund, there is a high likelihood that he or she may lose that refund if they file their case before the refund is received and spent.

In most cases, the timing of the bankruptcy petition is key. Therefore, it is imperative to discuss any tax refund issues with a local Louisville attorney before filing your Chapter 7 bankruptcy case.

If you’d like to learn more about the differences between a Chapter 7 bankruptcy and Chapter 13 bankruptcy (and which one is right for you), call or text me today at (502) 435-2593.

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