Avoiding Tax Refund Headaches

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If you’re thinking about filing for chapter 7 or chapter 13 bankruptcy in Utah, a tax refund can be a big  help or big  headache.  As a Salt Lake, South Jordan and Tooele bankruptcy attorney, I spend a lot of time sitting in meetings where bankruptcy trustees ask bankruptcy debtors about their financial affairs.  And every tax season, I wince every time I see a bankruptcy debtor who is not represented by an attorney learn from the trustee that they are going to have to give the trustee their tax refund.  Here are a couple of things to think about before you spend your tax refund or file your bankruptcy case:

PROBLEM 1:  If you file for bankruptcy in Utah before you get your tax refund, your refund becomes property of the bankruptcy estate, and you will have to pay it to the trustee or to your creditors or risk losing your bankruptcy discharge.

SOLUTION:  If there isn’t an urgent reason  to file your case immediately (such as needing to file to stop a foreclosure sale or a garnishment) wait until after you get your refund and have had a chance to spend it on reasonable and necessary expenses before filing.  If you don’t spend it before you file your Utah bankruptcy case, you will still have to give it up in your chapter 7 bankruptcy case or pay more money in your chapter 13 bankruptcy case, because you can’t exempt cash under Utah’s exemption laws.

BEFORE YOU SPEND YOUR TAX REFUND, however, you should talk with an experienced Utah bankruptcy attorney, because spending it in the wrong way (including giving or paying money to family members or buying a big-screen tv) can cause serious (read expensive) problems in your Utah chapter 7 or chapter 13 bankruptcy case.

 

PROBLEM 2:  It’s usually a good idea to hire a Utah bankruptcy attorney to help you avoid problems that often arise in chapter 7 or chapter 13 bankruptcy cases, but you can’t find a way to come up with money to pay for an attorney.

SOLUTION:  Using your tax refund to pay for your Utah bankruptcy is an acceptable way to use your tax refund without getting into trouble with your bankruptcy trustee or the court.  And paying a relatively little amount of money to make sure your bankruptcy is done right and get rid of a substantial amount of debt is a good investment.

 

PROBLEM 3: You filed your bankruptcy case before you get your tax refund.

SOLUTION:  Don’t spend your tax refund when you get it.  It doesn’t belong to you and your bankruptcy discharge probably be denied or revoked if you don’t give it to the Trustee.  Let your bankruptcy trustee know that you have it and wait until they tell you what to do with it.  If you have already spent it, talk with an attorney to see what your options might be.

 

In short, if you anticipate getting a tax refund this year, talk with an experienced Utah bankruptcy attorney about what you can and cannot do with your refund, and when it makes most sent to file your Utah chapter 7 or chapter 13  bankruptcy case.

Also, be sure to hire a reputable Utah Accounting Firm to do your taxes so you can minimize the amount of taxes you owe and maximize your refund.

Feel free to call me at 801.207.8262 with any questions.