For many Americans, their tax return is the biggest single check they see all year.
If you plan to file bankruptcy, however, your tax return can be a big headache — depending on how much it is and when you receive it.
Here are some tips for avoiding an issue:
1. Wait until your tax return is gone to file bankruptcy
If you anticipate a big return, you may want to delay filing bankruptcy. A big tax return is likely to be seized by the bankruptcy court in order to pay off some of your creditors. You can generally avoid this by filing your taxes and waiting until after your return is spent to file your bankruptcy.
2. Use the money from your tax return on necessary items
If you choose to get your tax return and spend it, use the money for necessary expenses — but not your credit card bills. There’s no point to paying your creditors any more than you have to when you plan on filing bankruptcy. However, good things to spend your tax return on include a wide variety of other necessary expenses:
- New tires or repairs to the family vehicle
- Vision or dental care for your family
- Have repairs done to your home
- Pre-pay your bankruptcy attorney
These are the sort of things that bankruptcy trustees aren’t likely to see as frivolous when you’re explaining where the money went. However, they allow you to avoid acquiring anything new of significant value (which could be an asset that the court might want to seize and sell).
2. Do not use it to repay family members or friends
You may feel a moral obligation to repay your family members of friends out of your tax return if you owe them money. However, doing so would be giving them preferential treatment among your creditors — which is a violation of the bankruptcy provisions.
If you do, you could be denied your bankruptcy. You also run the risk that the trustee in your case will demand that the individual, as your creditor, turn the money back over to the court.
You always have the option of getting legal advice before you file either your taxes or your bankruptcy. That way, you can address your specific situation and plan according to the answers.
