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The IRS may have dibs on your tax refund in Chapter 7 bankruptcy

Imagine that you have been in dire financial straits. Your credit cards are maxed out, you are having trouble finding a job -- the time has come to talk about a Chapter 7 bankruptcy. In a Chapter 7 bankruptcy, your assets go to a trustee who then uses the money to pay your creditors as much as possible. You can start fresh.

And starting fresh will look a lot better once that tax refund comes in.

Unfortunately, that feeling may not last long. That tax return may -- not will, but may -- be part of your bankruptcy estate.

"Bankruptcy estate" is the term used to describe all of the property or interests in property that the debtor has at the time of the bankruptcy filing, minus exclusions that the debtor qualifies for. Even if the refund is received after the filing date, you still need to look at a few things before you head off to Top of the Mark for a celebratory dinner.

The general rule is that anything earned, any property acquired after your filing date is not included in the bankruptcy. The first question, then, is whether your tax refund applies to activity that took place before or after the filing date.

A tax refund for the year before the filing date is as good as cash, and that cash is an asset that belongs in the bankruptcy estate.

A tax refund for the year during which the bankruptcy is filed is examined more closely. Any portion of the refund that covers the period prior to the filing date is part of the estate; anything covering activity following the filing date is not part of the bankruptcy estate. You filed for bankruptcy on Dec. 1, 2014. The portion of your refund covering the first 11 months of 2014 is part of the estate. December's portion is free and clear. And, any refund you receive in 2016 for money earned in 2015 is also yours to keep.

There are ways to time a bankruptcy and a tax return that will help you keep your refund. There are also exemptions, under federal and California law, that could help. If you need help figuring out the tax implications of bankruptcy or any other major change in your finances, you may want to consult with an attorney.

Source:, "A Tax Refund Is Part of Your Bankruptcy Estate," accessed April 3, 2015

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