How Bankruptcy and Tax Refunds Are Intertwined

There are more and more bankruptcies occurring on a day to day basis. This is happening for a variety of reasons. People have different types of debt; many are looking down the barrel of student loan debt, as well as credit card debt. When these levels become too high, many people are going to look at bankruptcy as a possible option for themselves.

In a chapter 7 bankruptcy (the type that most individuals declare), a trustee is assigned to each individual case. The role of this individual is to look for assets that are property of the bankruptcy estate and may be distributed to creditors.  However, many times clients often overlook tax refunds as being an asset of the bankruptcy estate.

Many people receive a tax refund when they end up overpaying the government throughout the course of the year. This happens automatically for most people when they are working a traditional job.

Prior to declaring bankruptcy, any of the money that you have overpaid to the government is going to be considered an asset, and therefore something that could be sought after by the creditors that you are declaring bankruptcy on. The money that you pay to the government after you file your bankruptcy will not count as an asset.

There is some math behind what part of your refund from the government is going to be considered an asset. The trustee will see the taxes that you file for the year closest to the one that you have filed bankruptcy, and they are going to take the total amount of any refund into consideration.

To determine how much of a tax refund will be property of the bankruptcy estate, the full amount of the refund is divided by 365 days and then multiplied by the amount of days into the calendar year that you filed for bankruptcy. Thus, those who are filling closest to the end of the year are going to receive a minimal portion of their refund. This is important if you are anticipating a large refund and want to know how much of it will be taken from you as an asset of the bankruptcy estate.

Those who receive large tax refunds are going to have to make sure that they are thinking about this issue strategically. This is the only way in which they are going to be able to try to protect as much of that refund as possible. Those who expect a large tax refund should adjust their withholdings so that they neither receive a large tax refund nor owe a large tax obligation.  This Withholdings Calculator is an easy way to figure out what your withholdings should be, given your current situation.  Shawn Stone Phoenix Bankruptcy and Student Loan Attorney can help you deal with all of these potentially complicated issues and navigate you through the legal process.