If you usually get a tax refund, filing bankruptcy before it arrives can feel like terrible timing. You may already be counting on that money for rent, car repairs, groceries, or unpaid bills.
Waiting until after tax season can make sense in some cases. In others, it may not help at all. Your refund is only one part of the decision. If your wages are being garnished, a creditor is suing you, or you are falling further behind every month, delaying bankruptcy just to wait for a refund could create a bigger problem.
Before picking a filing date, find out what would happen to the refund and the rest of your finances.
How a Tax Refund Can Affect Your Bankruptcy Case
A tax refund can count as an asset in bankruptcy even when the IRS has not deposited the money yet. For example, suppose you file Chapter 7 in February and expect a refund from the previous year’s income. You may already have earned the right to receive that refund before you filed. Not receiving the check does not necessarily keep it outside the bankruptcy case.
That does not automatically mean you will lose your entire refund. Bankruptcy exemptions may protect some property, depending on your circumstances.
Discuss this before filing, especially if you normally receive a sizable refund. Bring your recent tax returns to your bankruptcy attorney so the expected amount is not a surprise later.
What Happens If You File Before Receiving Your Refund
Your bankruptcy paperwork asks for financial information beyond what’s in your bank account that morning.
A Chapter 7 trustee may ask about refunds you expect to receive. If money arrives after you file for bankruptcy, the trustee may have an interest in some or all of it, depending on when it was earned and whether it is protected.
You may also need the refund for ordinary expenses. Your transmission may be failing, your furnace may need work, or you may be behind on utilities. Do not assume the safest move is to withdraw the money quickly or spend it before filing. Large purchases, transfers, and payments made shortly before bankruptcy can receive extra scrutiny.
If you receive a refund and use it for normal household needs before filing, keep records. Your attorney can tell you how the timing and use of that money may affect your case.
When Tax Debt May Be Included in Bankruptcy
Tax season can look very different when you owe the IRS. You may be able to discharge certain older income tax debts through bankruptcy, but tax debt follows its own set of rules. The age of the debt matters, along with when the return was due, when you actually filed it, and when the IRS assessed the tax.
A debt that seems old enough may still fail to qualify because one of those dates is too recent. Other events can complicate the calculation. Filing an extension, submitting an offer in compromise, or having a previous bankruptcy may affect the timeline.
Counting back three years and assuming a tax bill will disappear is risky. Have an accountant review your actual tax records before deciding when to file.
Why the Timing of Your Bankruptcy Filing Matters
Sometimes waiting costs more than it saves. If a creditor is taking money from every paycheck through garnishment, several more months can mean hundreds or thousands of dollars gone. You may also be facing a lawsuit, repossession, foreclosure, or growing credit card balances.
Filing bankruptcy generally triggers the automatic stay, which stops many collection actions. Waiting until your refund arrives may delay that protection.
Filing too soon can also create problems. A tax debt may need more time before it can qualify for discharge. A recent financial transaction may need review. An expected refund may affect how your property is handled.
The best filing date depends on what is happening with your money now, not simply whether April 15 has passed.
How a Bankruptcy Attorney Can Help You Choose When to File
Bring the full picture to your bankruptcy lawyer. Include recent tax returns, pay stubs, IRS notices, information about an expected refund, and records showing what creditors are doing. Tell your attorney if your paycheck is being garnished or if you are worried about losing your car or home.
Those details can change the advice you receive. You may find out there is no reason to wait until tax season ends. You may learn that waiting a short period could put you in a better position. What matters is making that choice before filing rather than discovering afterward that a different date would have helped.
Ask Kain + Henehan About Your Bankruptcy Case
At Kain + Henehan, we help people throughout Minnesota choose Chapter 7 or Chapter 13 bankruptcy. If you are expecting a refund, owe back taxes, or aren’t sure whether to file now or wait, bring those questions to us. We can review the tax issues along with your debts, income, property, and any collection activity you are already facing. Contact Kain + Henehan by calling (612) 438-8006 or filling out the online form to schedule a free consultation.