If you are planning on filing for bankruptcy, you need to understand the impact of tax refunds and bankruptcy in Ohio. When it comes to navigating bankruptcy and tax returns, you want to take every step possible to protect these funds so that you can improve your financial situation.
Are you wondering if you can keep your tax refund when you file for bankruptcy in Ohio? If so, check out this article, where we will be discussing tax refunds and bankruptcy in Ohio, and whether or not you can keep a tax refund in Chapter 7 or Chapter 13 bankruptcy.
How Tax Refunds Are Treated in Chapter 7
Tax refunds and bankruptcy in Ohio can get quite complex, depending on the type of bankruptcy you are looking at. When it comes to Chapter 7 bankruptcy, this can be quite confusing, as it can go either way depending on the circumstances.
In many cases, your tax refund is going to be considered a type of asset, which will go to paying off creditors. Keep in mind that how tax refunds are handled will often be dependent on what year they were for versus when you filed for bankruptcy. Tax refunds are prorated depending on the time of year you file for bankruptcy. Generally, if you file for bankruptcy before June or July of the year, then you will not usually be subject to losing your tax return because the amount of the return is going to be 50% or less than what it is at the end of the year. Generally speaking it is usually best to file earlier in the year for this reason.
However, you should be able to keep your tax refund for any years after filing for bankruptcy, as these refunds will not be considered part of your bankruptcy estate.
How Tax Refunds Are Treated in Chapter 13
When it comes to the Chapter 13 tax refund rules, tax refunds are handled a bit differently than when you file for Chapter 7. In the majority of cases, your tax refund will be used to go towards your Chapter 13 repayment plan, which will help you eliminate most of your debt.
That being said, there may be some situations where you are allowed to keep your tax refund. Generally speaking the trustee allows a debtor to keep the greater of $3000.00 or the combined amount of your earned income credit and additional child tax credit listed on your tax return. Anything above this amount must be turned over towards the bankruptcy plan and will be in addition to what you are required to pay in the plan This means it will not shorten the time of the bankruptcy. If you have kept up on all of your payments, then the trustee will allow you to file a motion to retain the tax refund as long as you show the necessity of keeping the refund. This means you need to show that you need more than the allowed amounts stated above for a specific purpose spelled out in the motion. This could be car repairs, house repairs, etc. Be mindful that the trustee will oppose it if you file more than one motion to retain tax refunds during the life of your plan. It is a much better idea to change your withholdings to not have as large of a refund given.
Exemptions That May Protect Refunds
The good news for individuals who are planning on filing for bankruptcy but want to protect their tax refund is that they may be able to use Ohio bankruptcy exemptions. The most common exemption that you may be able to use to keep your refund is the wildcard exemption. The wild card exemption allows you to keep cash or property that has a value as high as $1675.
Depending on the circumstances and the size of your tax refund, you may also be able to use the personal property exemption that provides protection for cash up to $550.
You may also be entitled to an exemption if you receive tax refunds based on the Earned Income Credit and Additional Child Tax Credit as these are exempt as well.
Best Practices for Filing Around Tax Season
Timing is one of the most important things to understand if you are filing for bankruptcy and want to protect your tax refund. You have to understand that any tax refunds from the tax year before you filed for bankruptcy and any unfiled tax returns that are due a refund will be considered as part of your bankruptcy estate. Because of this, it will be labeled as an asset that will most likely be used to pay off creditors.
But any tax refunds you get from the tax year after you have filed for bankruptcy will not be considered part of your bankruptcy estate, making it much more likely that you can keep this money. Because of this, you should try to time your bankruptcy filing in a way that allows you to keep your refund.
You can also try to prepare well in advance if you plan on filing for bankruptcy by adjusting your tax withholding so that you don’t get a large tax refund. The lower your tax refund, the less likely it is to be seen as a valuable financial asset. So, if you adjust your tax withholding so that you are only refunded a small amount, you may be able to keep this and put it towards other necessary expenses.
Your attorney can help you protect your tax refund by planning ahead or spending it on necessary expenses. A bankruptcy attorney can also examine your situation and help you determine whether or not you qualify for an Ohio bankruptcy exemption.
FAQ Section
Will I lose my tax refund in Chapter 7?
It is very likely that you will lose your tax refund if you file for Chapter 7 bankruptcy, if it is considered part of your bankruptcy estate. This may not be the case if your tax refund is for the year after you have filed for bankruptcy.
What if I already spent my refund before filing?
You have the option of spending your tax refund before filing for bankruptcy, as long as you have spent it on necessities. Expenses that would be considered necessary and wouldn’t get you into trouble, including things like mortgage payments, rent, food, car repairs, medical bills, etc.
Can I keep part of my refund in Chapter 13?
When you file for Chapter 13, you will usually either lose all of your tax refund or be able to keep all of it. This will be dependent on your repayment plan and whether or not you have maintained your monthly payments thus far.
How can I protect next year’s refund?
Any tax refund that you get for years after you have filed for bankruptcy should be protected and yours to keep. However, this may be in jeopardy if you fall behind on your financial obligations, especially when it comes to following your Chapter 13 repayment plan.
Hire a Bankruptcy Attorney in Ohio
If you’re planning on filing for bankruptcy in Ohio, you will need to know how this could impact your ability to keep your tax refund. Richard P. Arthur, Attorney at Law, has extensive experience handling bankruptcy cases in the state of Ohio, helping Ohio residents achieve a better financial future. To proceed with your bankruptcy case, contact us today at 937-254-3738 for a free consultation.