Of all the different types of bankruptcy filed in Florida, Chapter 7 is one of the most common. Unlike other types of bankruptcies, Chapter 7 allows you to discharge, or eliminate, all or most of your debt. A bankruptcy trustee will be assigned to your case and will oversee the proceedings. The trustee may also seize some of your property to help repay at least a portion of the debt.
Your tax refund will be considered as part of your property that can be seized by the bankruptcy trustee. This can be very detrimental to people filing for bankruptcy. As they are trying to get back on their feet financially, many people rely on their tax refund to pay for daily expenses and perhaps some debt that was not discharged during the process. Below, our Fort Lauderdale bankruptcy attorney explains how Chapter 7 will impact your tax refund and the ways you can protect yours.
Can the Trustee Take Your Tax Refund After Filing Chapter 7?
After you file Chapter 7 bankruptcy, a ‘bankruptcy estate’ is established. The estate contains all of your property that is not protected by the bankruptcy exemptions in Florida. Upon filing, the bankruptcy court then has the authority over the bankruptcy estate.
A bankruptcy trustee will also be assigned to your case and they have a great deal of interest in the estate. This is due to the fact that they receive a sizable commission on any property that is taken from the estate and liquidated to repay unsecured creditors. The trustee will only take property they can obtain a large commission from and so, if your tax refund is significant, it may be taken. On the other hand, if your tax refund is not substantial, you will likely be allowed to keep it.
Essentially, there is no way to determine if the bankruptcy trustee will take your tax refund after filing Chapter 7. However, it is important to know that in many cases, they certainly have the right to.
Filing Taxes After Chapter 7: What Changes?
After filing for Chapter 7 bankruptcy, you must file the proper forms during tax season. Under the Bankruptcy Code, you are required to file an individual tax return. If you do not, or you do not ask for an extension, your bankruptcy case may be converted, or dismissed entirely. In the majority of cases, you will follow the same process for filing your taxes after bankruptcy as you did before you filed. The only difference is that you will need to file a 1040 tax return as you usually do, but your bankruptcy trustee will file a Form 1041 for the bankruptcy estate.
It is also important to consider that you might receive a 1099-C Cancelation of Debt from a creditor after you have received a discharge. Discharged debt is treated by the Internal Revenue Service (IRS) as forgiven debt, meaning you may have to pay taxes on it. Any debts that were discharged in your bankruptcy case are not treated as income. You do, though, need to file an IRS Form 982 along with your taxes. This notifies the IRS that you have had debt discharged in bankruptcy. It is important to discuss any 1099-Cs you receive with a knowledgeable bankruptcy attorney.
Ways to Keep Your Tax Refund While in Chapter 7 Bankruptcy
Although your tax refund will become part of your bankruptcy estate, there are ways you can protect it from being seized.
One of the best ways to protect your tax refund during Chapter 7 bankruptcy is to use the generous exemptions available in Florida. One of the most beneficial exceptions is the homestead exemption, which allows you to protect up to 100 percent of the equity in your home. If you do not use the exemption, you can use Florida’s wildcard exemption.
The wildcard exemption in Florida allows you to protect up to $4,000 of your personal property. This can include your tax refund. It is not uncommon for people to use the wildcard exemption to first protect their tax refund, but there are other types of property you can protect, as well, such as electronics or vehicles.
If your tax refund is greater than $4,000, you may not be able to protect it entirely during bankruptcy. While there are federal exemptions as well, borrowers in Florida are prohibited from using them, so you must use the state exemptions.
Another way to keep your tax refund while in Chapter 7 bankruptcy is to wait until you receive it before you file. You should then also spend it before you file bankruptcy, but you must be very careful when choosing this option. The bankruptcy courts in the state do not look kindly upon borrowers who make large purchases or pay down certain debts before filing bankruptcy.
If you choose to receive and spend your tax refund before filing for bankruptcy, you must spend it only on necessary expenses, such as paying your mortgage or rent. You cannot spend your tax refund on paying down creditors, even if you are repaying family members, or purchasing luxury items. If you buy large items you do not need, the bankruptcy court will question why you can make such a purchase but not pay your debt. The judge may even deny your discharge because they believe you are acting in bad faith.
You also cannot repay loans because these are considered ‘preferential payments’. This means that you have favored one creditor over the others. The bankruptcy trustee may even take the money back so they can equitably spread it around to all of your creditors.
Contact Our Attorneys to File Bankruptcy in Florida
At Loan Lawyers, our Florida bankruptcy attorneys can review the facts of your case and determine the best way to protect your tax refund and other property. Call us today at
(954) 523-4357 or fill out our online form to request a free review of your case and to learn more.
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Loan Lawyers is made up of experienced consumer rights attorneys who use every available resource to develop comprehensive debt solution strategies. Our goal is to take on those burdens, resolve those problems, and allow our clients to sleep soundly knowing they are on the path to a better future.
