If you’re like most people, your tax return is the single biggest windfall you get every year — particularly if you’re entitled to the Earned Income Tax Credit (EITC) or certain other credits.
So what happens to that return if you file bankruptcy? Is there a way to protect that money? Here’s what you need to know:
If you haven’t yet filed your bankruptcy
If you’re considering bankruptcy, it isn’t wise to spend your tax return on any of your credit cards or other potentially dischargeable debts. Doing so could cause delays when you actually decide to file later because you can’t show preference to one creditor over another.
Instead, you may be able to spend the money on necessary items that meet your current needs, like:
- Home repairs, including roofing, plumbing repairs, electric upgrades, and rodent or insect control
- Your mortgage (unless you intend to let your home go in the bankruptcy)
- Utility bills, especially if you have past-due amounts and are trying to avoid shutoffs
- Food, clothing, and medical needs for yourself or your dependents
- Car payments or repairs (again, unless you intend to let the vehicle go in the bankruptcy)
- Educational costs, tutoring and special classes for yourself or your children
The key here is to make sure that you’re putting the money toward necessary, useful expenses or the needs of living — not luxury goods and services or payments toward debts that should be put in the bankruptcy itself.
If you’ve already filed for bankruptcy
If you’ve filed your bankruptcy already, the best way to protect your refund may be through an exemption. Exemptions allow you to keep some of your assets out of liquidation — although you may have to choose carefully which assets you want to shield.
Once your bankruptcy is discharged, you generally don’t have to worry about the trustee coming after your return — but that won’t necessarily help if April 15 is right around the corner. Bankruptcy in no way relieves your obligation to file your return in a timely manner.
If you’re hopeful about keeping your tax return despite the need to file bankruptcy, it may be wise to take your concerns to an attorney early. Sound advice that’s specific to your needs can help you avoid trouble later.