As I write this in August 2020, tax refunds may not be at the forefront of your mind. Most people have filed and received their refunds (if any) by now, even with the extension to file. However, this is the time of year when future tax refunds begin to play a larger role when planning for bankruptcy.
In Chapter 7: An often overlooked asset is your tax refund that you will receive in the following year. It is counter-intuitive, because you don’t have it yet, and you don’t even know what it will be! Generally, it works like this: we look at your bankruptcy filing date, determine what percentage of the year has passed, and list that percentage of your estimated refund as an asset. If you file on October 1st, that date is about 75% of the way through the year. With an expected refund of $8,000, we would list 75%, or $6,000, as an asset. The good news is that in the majority of cases we are able to use an exemption (a law protecting your property from being turned over to the trustee) so that you can keep your future tax refunds. If the refunds cannot be protected, timing the filing of the bankruptcy becomes important so that assets are not unnecessarily lost in the bankruptcy.
In Chapter 13: In this area (Western District of New York, Buffalo Division), Chapter 13 bankruptcy filers generally retain their tax refunds instead of turning them over to the trustee as part of a repayment plan. But expected tax refunds are already factored in as part of income when determining the appropriate monthly repayment amount.
I have witnessed many cases where an attorney (or individual who filed without an attorney) at the trustee meeting has overlooked this asset. Analyzing tax refunds is key to avoiding unpleasant surprises from the trustee.