Can I Keep My Tax Refund?
The quick answer is that you can almost always protect your tax refund. There are several different scenarios at play, so first, it is best to understand your rights outside of bankruptcy, and then I will address what happens to your tax refund when you file bankruptcy.
Outside of bankruptcy, the only creditors that can touch your federal tax refund are back child support or other governmental obligations, including student loans. For a Minnesota state refund, the same thing is true. Private creditors cannot otherwise seize your tax refund directly from the government, but once it has been deposited into your bank account, a judgment creditor could levy on your bank account. If it is deposited into a bank account and you owe money to the bank, they could also do what is called a “setoff,” and the bank could refuse to permit you to withdraw the money. (Lesson No. 1: Don’t deposit your tax refund into a bank to which you owe money if you are not paying it That is like putting your hand in an alligator’s jaws. Lesson 2: If there are judgments against you, you should keep your money out of the bank as well.)
Once you file bankruptcy, any tax refunds that are due and owing to you are part of what is called your bankruptcy estate, and part of my job is to ensure that you can protect most if not all of your tax refund. If, for instance, your bankruptcy is filed under March 31, 2012, and you have not yet filed your 2011 taxes, then your 2011 tax refund, as well as 25% of your 2012 taxes (since we would be three months into the year) are the property of your bankruptcy estate. As long as we are able to protect your assets under the federal exemption, which is $12,000 per person, this is usually not an issue. If you have already received the tax refund and it is cash on hand and your miscellaneous assets are otherwise within the $12,000, that’s not an issue, either.