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The Chapter 7 Bankruptcy Trustee and Your Tax Refund:
It comes up every tax season. You’re looking forward to receiving a big tax refund check, and you’re also working hard to get your bankruptcy case filed. So, what happens to your tax refund in a Chapter 7 bankruptcy in Georgia?
Tax refunds are a popular asset that Chapter 7 trustees routinely take from debtors. If you don’t have enough bankruptcy exemptions to protect your tax refund then it is fair game for the trustee to take. Trustees live to go after tax refunds because, unlike real estate and other assets, there isn’t the overhead and effort associated with listing the property for sale. With cash, they just make you write them a check.
Your Tax Refund is Part of the Bankruptcy Estate
On the day the bankruptcy is filed, any assets that you own become part of the “bankruptcy estate.” Your tax refund is one of those assets. A trustee is appointed to represent your creditors, collecting assets and liquidating those assets to pay your creditors. In most Chapter 7 cases, there simply are not enough assets or cash to make it worthwhile for the trustee to take those to pay the creditors.
Unfortunately, if you are owed a large tax refund, that may be an easy target for the trustee. With a little planning, we can help you keep most, if not all, of your tax refund.
Want to Keep Your Refund? Make Sure You Have Enough Exemption to Cover it OR Make Sure You Spend it on Necessary Items
The best way to avoid losing your tax refund is to file your tax return, receive the refund and either ensure that it is covered by your Georgia bankruptcy exemption or spend it prior to filing your bankruptcy on necessary living expenses. Your bankruptcy attorney should instruct you to keep a record of how your refund is spent.
Your refund can be used for a variety of expenses, including most of your ordinary household expenses, like:
- Mortgage payments
- HOA dues
- Medical and dental expenses
- Home maintenance and repairs
- Car payment
- Car repairs and maintenance
If you are able to follow these steps, you will not be required to turn over your tax refund.
Important Note! If you spend your tax refund on luxury goods, use it to repay a friend or family member, or pay off a credit card or other unsecured debt, you will trigger an objection from the trustee, and be required to turn over your tax refund, even if you HAVE spent the money.
If you have NOT received your tax refund on the date of filing, the trustee will be entitled to the tax refund when you receive.