A lot of people look forward to receiving their tax returns each year because that sudden influx of cash makes it easier to pay for necessities and maybe a few extras.
What happens to your tax return, however, if you know you plan to file for Chapter 7 bankruptcy protection fairly soon? Do you have to give that money up? Not necessarily.
Get your refund first, then file bankruptcy
One way to manage the issue and keep your tax return money is to make sure that you file your taxes and wait until all the money you get back is spent before you file for Chapter 7.
Even then, however, you need to realize that the trustee has broad authority to pry into your financial actions in the period leading up to your bankruptcy, and they can and will ask questions about how much you received from your taxes and how the money was spent.
You could create serious problems for yourself (and others) if you spend the money on luxury items, repay loans to your family and friends or even pay off a particularly aggressive creditor while fully intending to file bankruptcy. Luxury purchases could cause you to be accused of misusing the bankruptcy process and lead to a denied discharge. Paying back debts could get you into trouble for making preferential payments that favor some creditors over others.
So, what can you spend your tax return on? Broadly speaking, you can use that money for current necessities, such as:
- Paying your legal fees for the bankruptcy itself
- Getting car repairs, new tires or maintenance
- Food, clothing and utility bills
- Home repairs, such as redoing your roof
- Educational expenses
Because there are a lot of nuances in the law, it’s always wisest to make sure that you have clear guidance before you actually file for bankruptcy. That can help you avoid potential complications once you are ready to take that step.
