Tax refunds are considered property of a bankruptcy estate, regardless of whether you have received them and have the cash proceeds, check in your hand, or money in the bank, or whether you haven’t filed yet. It’s my job as a bankruptcy attorney to help people protect something that is often a debtor’s biggest asset this time of year.
Most people can protect their tax refunds up to $13,000 as long as they are able to utilize federal exemptions, which is most typically people who either don’t own real estate, or have a home that is underwater or with little equity. Debtors with substantial home equity need to protect their assets under state law in bankruptcy, which does not permit them to protect tax refunds unless it is based on need, i.e. earned income credit or the state working family credit. So debtors utilizing state (i.e. MN) exemptions this time of year are typically advised to file their taxes, and spend down the proceeds on necessities (not to sound greedy, but bankruptcy attorney’s fees are acceptable), making sure to account for the spend down. It is important not to give anything away or pay debts back to relatives, nor to convert the money into other nonexempt assets. The do’s and don’ts of spending down money should be carefully reviewed with your attorney beforehand.
One thing to keep in mind, is that even if you have received your 2015 refund and we file e.g. at the end of March, then 25% of your 2016 refund is property of the estate. If it’s not going to be exempt, then changing your withholdings so you don’t get such a large refund next year is good advice, in fact that’s just good budgeting advice regardless of whether you file bankruptcy – why starve yourself 11 months and get it all back in the 12th month every year?
Property tax refunds typically come in September of each year. A case from a couple years ago held that they are not exempt as “relief based on need” under state law. But that holding may be ripe for being overturned due to other recent cases.