Section 541 of the Bankruptcy Code dictates the content of a debtor’s personal belongings, including receivables, which automatically become part of a debtor’s bankruptcy estate the moment his/her case is filed. In other words, if you have not filed your tax returns prior to the filing of bankruptcy, any tax refund that you’re entitled to belongs to your bankruptcy estate the moment you file for bankruptcy.

It is important you speak to a knowledgeable bankruptcy attorney regarding your tax refunds to find out what your options are BEFORE you file for bankruptcy. Below are some questions that I have received.

Q: We are now in March 2013, I have yet to file my tax return for year 2012. If I must file for bankruptcy now, what will happen?

A: Your case will not be concluded until your tax return is filed. The Bankruptcy Code dictates that tax return of the year immediately preceding the bankruptcy filing year must be submitted to the trustee. Therefore, your case will not be concluded until your tax return is filed and submitted to the trustee.

Q: What happens after I submit my tax return to the trustee?

A: The trustee will determine whether you’re entitled to any tax refund, and if so, whether that tax refund should become part of your bankruptcy estate, subject to liquidation in order to pay your unsecured creditors.

If you have not used up the maximum amount of exemption that you’re entitled to, you may apply the rest of the exemption to exempt your tax refund. If you have already used up your exemptions, however, you may have no choice but either to (1) surrender your tax refund to the Chapter 7 trustee, or (2) pay the amount of tax refund you’re entitled to through your Chapter 13 plan.

Q: We are now in March of 2013 and I have not filed my 2012 tax return yet. What should I do?

A: It is generally advised that you file your tax return prior to filing for bankruptcy. When you know what your tax refund is, you have many options.

In the state of Florida, you’re allowed up to $6,000.00 in exemptions if you’re not claiming a homestead property (i.e. if you do not own a home that you wish to claim exempt in bankruptcy). After your other personal assets are exempt, if you are still have room left to claim more exemptions, you can exempt your tax refund.

For example, the aggregate value of your vehicle, your bank accounts, your furniture and other personal belongings is $2,000.00, you have another $4,000.00 of exemption left. If your tax refund is less than $4,000.00, you may file for bankruptcy any time you wish and your tax refunds would not be affected.

If your tax refund exceeds your total allowed exemption, and you need the refund for daily necessities, you may want to fulfill those necessities prior to the filing of bankruptcy. While spending your tax refund in daily necessities, such as grocery, commuting expenses, rent, mortgage, etc. is allowed, it is generally advised not to spend your tax refund on non-essential needs – such as taking a trip, buying luxury items, gift to a friend or family member, etc.. You should also document everything that you spend your tax refund on, in case the bankruptcy trustee questions you on how it was spent.

Speak to a knowledgeable Fort Lauderdale | Miami Bankruptcy Attorney today to find out more about tax refunds and bankruptcy.