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Bankruptcy Law Blog

Wednesday, April 17, 2019

Can I Keep My Tax Refund If I File For Bankruptcy?

April 15, otherwise known as Tax Day, is rapidly approaching. Many people have been asking us what will happen to their expected tax refund if they have filed for bankruptcy or are planning on filing soon. The answer is every lawyer’s favorite answer, it depends. 

Whether you get to keep your refund or have to hand it over to your creditors depends on what chapter of the bankruptcy code you file under and when the money you paid too much taxes on was earned. 

Chapter 7 vs. Chapter 13


There are two main chapters of the bankruptcy code that people filing for personal bankruptcy typically file under — Chapter 7 and Chapter 13. 

A Chapter 7 bankruptcy is what most people consider a traditional bankruptcy. Assets are liquidated to pay off creditors, and then most of the debts that remain are forgiven. If you file for Chapter 7 bankruptcy you may or may not get to keep your tax refund. Whether you get to keep your refund depends on the timing of your bankruptcy. This is discussed in detail below.  

If you file for bankruptcy under Chapter 13, you are probably not going to be able to keep your refund to spend as you wish. Chapter 13 bankruptcies are centered around a repayment plan. Your refund will typically be turned over to your bankruptcy trustee to make repayment plan payments, or be used by the trustee to pay a creditor on your behalf. 

Timing Is Everything 


If you file for bankruptcy under Chapter 7, keeping your tax refund is all about timing. 

If the refund is on taxes paid in the prior year, the money will be taken by the bankruptcy trustee to pay your creditors. It is basically treated like money you had sitting in your bank account all along. 

If the refund is on taxes paid in the year that you filed for bankruptcy, you will get to keep the part that is related to taxes paid after you filed. The portion related to taxes paid before you filed is taken by the bankruptcy trustee to pay your creditors. 

If the refund is totally tied to taxes that were paid after you filed for bankruptcy you will get to keep your refund and use it as you see fit. 

Planning on filing for bankruptcy soon? Protect your refund by spending it. 


If you have not yet filed for bankruptcy, and you want to keep a refund you have just gotten, or you hope to get, spend the refund on things that are considered “necessary expenses” before you file for bankruptcy. 

Necessary expenses include rent or mortgage payments, food, medical expenses, basic clothing and educational expenses. 

Do not spend the money on luxury items, or try to pay back a friend or relative that you owe money. The courts will try to claw that money back. 

If you need help figuring out what chapter of the bankruptcy code to file under, or advice on when to file, please call our office in Mobile to schedule a free initial consultation

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Padgett and Robertson assist clients with Bankruptcy, Personal Bankruptcy, Consumer Bankruptcy, Chapter 7 Bankruptcy, Chapter 13 Bankruptcy and The New Bankruptcy Law in Mobile, Alabama and throughout southern Alabama. Alabama State Bar Association Regulations require the following: "No representation is made that the quality of the legal services to be performed is greater than the quality of legal services performed by other lawyers." 11 U.S.C. 528 of the U.S. Bankruptcy Code requires the following: "We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.”



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Alabama State Bar Association Regulations require the following: "No representation is made that the quality of the legal services to be performed is greater than the quality of legal services performed by other lawyers." 11 U.S.C. 528 of the U.S. Bankruptcy Code requires the following: "We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.”