Tax season has arrived once again. People who have filed for Chapter 7 Business Bankruptcy or are considering doing so are understandably anxious about what would do to their tax returns if they file for bankruptcy in this manner. Following the proper procedures for bankruptcy filing can protect your tax refund. Most debtors who file for bankruptcy lose their tax returns because they either did not have a lawyer or hired an incompetent or reckless one who failed to properly disclose and exclude the refunds.
Administration Of An Insolvent Estate
Once a bankruptcy petition is filed, control of the debtor’s assets passes to the trustee. The trustee oversees the bankruptcy estate. The trustee must liquidate the debtor’s assets to satisfy the creditors. In the Bankruptcy Code, “asset” has a very broad meaning. Insolvent parties’ assets might include current and potential possessions and rights to future acquisitions. In bankruptcy cases, it is essential to choose a competent and comprehensive attorney since it is only sometimes obvious to the untrained eye what assets are exempt from liquidation.
Who Gets The Company’s Income Tax Refund?
Tax refunds or tax returns are treated as assets in all Chapter 7 bankruptcies. Debtors often recognize that any due tax refunds are an asset when they file for bankruptcy. Most bankruptcy filings also include anticipated tax returns for the current year. Most debtors are unaware that a portion of their federal tax return from the year they filed for bankruptcy is included in the asset pool. As a result, even if you don’t get your tax refund for 2014 until 2015, a portion of it will become part of the bankruptcy estate if you file for bankruptcy in 2014.
The share of a tax refund included in the estate of a bankrupt individual is determined by some factors, including the debtor’s marital status and how tax returns are submitted. Even though the tax returns that led to the refund were filed jointly, only half of the refund will be considered an asset of the bankruptcy estate if the other person does not participate in the bankruptcy petition.
The Exemption System: A Backstop For Tax Documents
Providing individuals with a fresh financial start was a primary motivation for the Bankruptcy Code. As part of this fresh start, the debtor will be shielded from the trustee’s efforts to wipe out their assets completely. That’s why the Bankruptcy Code includes safeguards like exemptions.
Tax refunds are protected in the same manner as monies in a bank account are protected by a “wildcard” exemption. The current maximum amount per debtor for the wildcard exemption is $12,725.00 (this amount is modified every quarter). Having additional assets, however, might limit your ability to claim a tax refund exemption. If the debtor has different assets that need to be exempted and a wild card is the only way to protect them, the liquidation process might be problematic.
With the assistance of a knowledgeable bankruptcy attorney, any problems associated with the liquidation process may be recognized, investigated, and planned for. To keep your tax refund out of liquidation, you should file for bankruptcy well before you receive it. If you need advice deciding whether or not to use your refund on necessities, a lawyer can advise you. If you want to prevent liquidation by spending your tax return, you should always contact an attorney beforehand to ensure the court considers the expenses fair.
Filing for Chapter 7 bankruptcy does not ensure receiving a tax refund. Timing is essential when filing for bankruptcy, as is complete transparency and proper use of exemptions. In most cases, having a qualified bankruptcy attorney manage your case will allow you to retain your tax return fully.