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Waive Good-bye to Your Tax Refund if you File Bankruptcy Before You Get It and Spend It!

By Joseph McDaniel, Esq.

I've written often in the past about tax refunds. They are one of those things that makes the timing of a bankruptcy a little tricky.

Now, some folks are easy to fix with a bankruptcy in Arizona, because some folks are lucky. They have a lot of debt, they stop making payments, and their creditors promptly take a nap!

With our lucky bankruptcy clients, we can tinker with the filing date of their bankruptcy, and wait until the debtor has had time to receive their tax refund, and spend it on food and mortgage and car payment and similar items prior to filing the bankruptcy.

Some folks are not so lucky; their creditors are on amphetamines, and those creditors are hard-driving sons of guns!

And even if there is a substantial tax refund coming in, many debtors can't tolerate being garnished for a couple of months prior to filing, in order to receive and spend that tax refund.

So there are cases in which the optimum result is not achieved for a bankruptcy client, in economic terms, because their facts and situation and pain tolerance just don't permit it.

Consumer bankruptcy is an art, not a science. 

Now, if there's a non-dischargeable priority debt which is not a tax, and a tax refund goes into that bankruptcy estate, and the tax refund is used by the trustee to pay that non-dischargeable priority debt, I'm a lot less sad.

In that situation, the debtor gets much of the benefit of the tax refund, even if he doesn't receive it directly.

And I know that what I just said is a little confusing, but I'll explain it more completely when you drop in to talk with me; until then, remember that if you have not received your tax refund by the date of filing, it belongs to the bankruptcy trustee appointed in your Chapter 7 case, and must go to that trustee, under penalty of losing your bankruptcy discharge.

And that is one heck of a penalty!

p.s. sometimes a trustee will pro-rate the tax refund, so that the debtor will receive some of it. I'll discuss that as time moves forward, but for now, assume that if it goes to the bankruptcy trustee, you will never see it again in this life!

Full post as published by Arizona Bankruptcy Attorney Blog on December 21, 2010 (boomark / email).