At the moment you file bankruptcy, your bankruptcy estate is created, and any claim that you have, including a tax refund from last year, and even a pro rata portion of the tax refund that you get next year for this year, is considered property of your bankruptcy estate. Just because you have not filed your taxes does not mean that you do not have the right to do so, and this time of year, that right is part of your bankruptcy estate, even if the tax return has not been prepared or filed yet. Proper planning with your bankruptcy attorney will almost always result in you protecting your tax refund. A prior blog post discusses how tax refunds are protected in bankruptcy.
Most people without substantial equity in their house can protect their assets under the federal exemptions, which provides a miscellaneous exemption of nearly $13,000, which is usually sufficient to protect tax refunds, past, present and future. There are circumstances however where it might be best to file the taxes first and spend down the proceeds in certain circumstances. Those circumstances vary on a case-by-case basis and should be discussed in detail with your attorney. When doing prebankruptcy planning, there are certain do’s and don’ts, so you are well advised to hire an attorney now, and one of the important things the attorney will discuss with you is the timing of filing your bankruptcy petition, whether it is chapter 7 or chapter 13.
My office policy is that I will not file a bankruptcy petition for someone unless all of their tax returns have been filed. This time of year, since returns are not due until April 15, I will certainly file a case if last year’s taxes are not ready, but my preference is that the tax returns be prepared prior to filing the bankruptcy, so that we can fully analyze whether the refund will be protected, and/or how the ramifications of any liabilities will affect a budget and possibly a chapter 13 plan.