Will Filing Bankruptcy Affect My Tax Refund?

It’s everyone’s favorite time of the year – tax season! While filing taxes is always a hassle, some people at least have sizable tax refunds to anticipate. But if you owe taxes you are unable to pay, this could just add to a portfolio of debts that have gotten out of control. If you’re considering bankruptcy during tax season, you need to understand how your tax refund could be affected. If you count on your tax refund, a bankruptcy could seriously tamper with your annual budget. Don’t enter a bankruptcy with uncertainty. Schedule your free case evaluation with one of our experienced Arizona bankruptcy lawyers today by calling 480-833-8000.

Will Filing Bankruptcy Affect My Tax Refund In Arizona

Chapter 7 Bankruptcy & Property Exemptions

The most common type of consumer bankruptcy, both in Arizona and across the country, is Chapter 7 bankruptcy. This is because it clears away common unsecured debts like credit cards, medical bills, and even some tax debts. However, it isn’t designed to help people with considerable income and/or assets. There are strict income restrictions that must be met before someone is eligible to file Chapter 7 bankruptcy. Another important consideration when filing Chapter 7 bankruptcy is your state’s bankruptcy exemptions.

Arizona has its own bankruptcy exemptions, and is not a state that allows for debtors to substitute in federal bankruptcy exemptions. Anything you own that isn’t protected by a bankruptcy exemption can be taken by your bankruptcy trustee. Each exemption has its own value – for example, the homestead exemption in Arizona is $150,000, and the motor vehicle exemption in Arizona for an individual is $6,000. And the bank account/cash in hand exemption in Arizona for the day your case is filed is only $300 for an individual and $600 for a married couple. Also, unlike many states, Arizona doesn’t offer a wildcard exemption that can be used on any asset the debtor chooses, including a tax return. Essentially, there is no exemption in Arizona that you can use to protect your tax return. Thus, for more information about Arizona’s bankruptcy exemptions, schedule your free bankruptcy consultation at 602-609-7000.

Can The Bankruptcy Trustee Take My Tax Refund When Filing BK In Arizona?

When you declare bankruptcy, your trustee actually has the authority to seize certain assets you may receive in the future. Examples of these include inheritances and personal injury awards. But the most common type of future payment your trustee will take from bankruptcy debtors is tax refunds. This is an easier type of asset to seize than real estate or a vehicle, as the trustee won’t have to sell it at auction. A tax return is simply a check for the trustee to cash.

The relevancy of your tax return will depend, in part, on what time of the year you file bankruptcy. If you file early in the year, your tax return for the previous year can be taken by the trustee. If you file in the middle of the year, your tax return for that year is partially at risk from being taken by the trustee. The percentage the trustee can take will depend on the month of the year in which you filed. Your tax returns for the tax year after your bankruptcy will not be subject to seizure by the trustee. If you have additional questions about which tax refunds will be at risk in a bankruptcy, schedule your free case evaluation at 480-833-8000.

Can I File Bankruptcy In Another State, Other Than Arizona, Where My Tax Return Would Be Protected?

Some Arizona Chapter 7 Bankruptcy and AZ Chapter 13 Bankruptcy filers try to get creative when they learn that the bankruptcy trustee might be taking their tax refunds. However, you can’t simply take advantage of another state’s bankruptcy exemptions by filing there without meeting the proper requirements. Contrary to popular belief, owning property in a state usually isn’t sufficient proof that you are eligible to file bankruptcy in that state. In Arizona, you must be a resident of the state for at least 6 months before you can file your bankruptcy here. Residency requirements vary by state, so talk to your local bankruptcy attorney to see which states’ requirements you meet.

Spend Your Tax Return Before Declaring Bankruptcy In Arizona

One way to avoid the downside of losing your tax return in bankruptcy is to spend it before you file your case. That way, it won’t even be in your bank account for your trustee to take. But you should still be sure to spend your tax return on reasonable things in the time period leading up to a bankruptcy filing. Your trustee will be reviewing your financial information to make sure you aren’t hiding assets or trying to otherwise commit bankruptcy fraud in your filing.

Your bankruptcy trustee recognizes that you need to continue paying your daily living expenses while you file bankruptcy. Regular expenses like your rent or mortgage, utilities, wi-fi, cell phone, and more can continue to be paid, and you can even prepay some of these expenses if you’re looking to spend your tax return. You can also stock up on food and household supplies like paper towels and detergent. If you have a Costco membership, you know just how easy it is to spend about the amount of a tax return in one day. You can also spend it on necessities like school supplies or vehicle upkeep. You may also have a dental or medical expense that would be the perfect opportunity to spend your tax return.

Things To Avoid Spending Your Tax Return on When Filing Bankruptcy In AZ

There are certain things that you should definitely avoid spending your tax return on before your bankruptcy. You should avoid preferential payments while you are planning a bankruptcy, which are debt payments made to someone close to you (e.g., a parent or friend) in favor of paying off the rest of your debts. If you do so, the trustee can later “claw back” these payments and add it to your bankruptcy estate to be split more evenly amongst your creditors. You should also avoid spending your tax return on extravagances and luxuries. In some instances, the trustee may be able to take them back if they are nonexempt, or exclude them from your bankruptcy if you purchased them with credit. For additional guidance with pre-bankruptcy tax refund spending, call to speak with one of our bankruptcy lawyers at 480-833-8000.

Need a High Quality, Low Cost Bankruptcy Attorney During Tax Season?

Your tax return is probably just one of several concerns you have about filing bankruptcy. Our Tucson and Phoenix bankruptcy lawyer team has the knowledge and experience to help you navigate all of bankruptcy’s complexities. Whether you want to time your filing so that your tax refund will be exempt, or you need help spending it before you file, our lawyers can guide you through every step of the bankruptcy process.

We understand just how financially stressful a bankruptcy can be, and therefore offer our clients skilled services with affordable payment options. Eligible clients can file using our Zero Dollars Down bankruptcy payment plan – that’s right, pay for your bankruptcy AFTER it has been filed. Or, if you’re looking to spend your tax return, you can receive a discount for paying in full before filing. To learn more, call to schedule your free case evaluation with our Arizona Zero Down bankruptcy team at 602-609-7000.

Arizona Zero Down Bankruptcy Logo

Arizona Offices

Phoenix Location:
343 W Roosevelt Street, Suite #100
Phoenix, AZ 85003
Email: [email protected]
Phone: 602-609-7000

Mesa Location:
1731 West Baseline Rd., Suite 101
Mesa, AZ 85202
Email: [email protected]

Glendale Location:
20325 N 51st Avenue, Suite #134
Glendale, AZ 85308
Email: [email protected]

Tucson Location:
2 East Congress, Suite #900
Tucson, AZ 85701
Email: [email protected]