Student Loans and Bankruptcy

Does Chapter 7 Bankruptcy Affect Your Next Tax Refund Check?

3 January 2016

Roy Sanders

If you are in trouble financially and decide to file Chapter 7 bankruptcy, you will find relief almost instantly after filing the paperwork. This chapter of bankruptcy gives you relief from your creditors and helps you get rid of debts, but there are consequences too. One consequence involves surrendering things you own, and your next tax return might be one of things you will have to give up.

Why the trustee has a right to your tax return

When you file for Chapter 7, the bankruptcy trustee handling the case has the right to seize some of your assets if they can be liquidated quickly. This is done because Chapter 7 allows you to have debts discharged. If the trustee can raise cash by selling or seizing things you own, he or she will do this so your creditors can at least receive some of the money they are owed.

After you file for Chapter 7, the trustee will determine which assets you can keep and which you cannot. If you have cash on hand, it is likely the trustee will ask you for it. If you have assets that do not have equity, such as a house or a car, the trustee is not likely to ask for them.

How to avoid losing your tax return

Once you file for bankruptcy, the trustee has the right to seize your return filed for the current year. One of the best ways to avoid losing this money is by changing your exemptions with your employer. Your paychecks are based on several things, including the number of exemptions you claim. If you claim only one exemption, your employer will withhold more taxes than he or she would if you had claimed four exemptions.

If you bump up the number of exemptions you want to claim with your employer, your employer will begin withholding fewer taxes. This means that your paychecks will be higher, but it also means that you may not receive a tax refund when you file your taxes. If you do not receive a tax refund, the trustee will not be able to seize it. The best part about this is that you will actually still receive the money, except that it will be delivered to you in small amounts each time you receive a paycheck.

If you would like to learn more about Chapter 7 bankruptcy, contact a reputable bankruptcy lawyer like Richard S. Ross - Bankruptcy Attorney in your area today.

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