This is the time of year when people start to file tax returns. It’s also a time of year when people think about filing bankruptcy. The holidays are over, the bills are coming in and a lot of people realize there is no hope to dig out of the financial hole they’re in.
If you’re thinking about filing bankruptcy and expecting a tax refund, keep in mind that any refund is property that is subject to being taken by the bankruptcy trustee. The thing to do is file your tax returns, receive your refund and then spend it before you file bankruptcy. But the big question is, what should you spend your refund on?
For starters, it isn’t a good idea to use that refund to make a deposit on the cruise you’ve always wanted to take, or to buy some diamond earrings. The reason is those kinds of things aren’t exempt in bankruptcy. If you turn your refund into non-exempt items, those items can be taken just as if the refund was sitting in your bank account. And it won’t work to withdraw the money and stick it in a shoe box under your bed. It still has to be reported on your bankruptcy schedules as “cash on hand” and will have to be turned over to the trustee.
There are things you can safely spend the refund on. Paying your attorney is one of those. You can use the refund to buy necessities. You are permitted to have a year’s worth of food storage, so you could stock your freezer and pantry. Household appliances are exempt. If your stove only has one working burner and the oven is permanently set at 300 degrees, you can buy a new one. Same for the washer and dryer. Home or car repairs (if you’re going to keep your home or car) are also fine. Just be sure the repairs don’t increase the value of the home or car above your allowed exemption limit. If you want to save that money you can contribute it to an IRA.
There are ways to preserve your tax refund. The best thing is to talk with an attorney who knows bankruptcy law and what exemptions you are entitled to.