A successful bankruptcy petition requires advanced planning. Taking the wrong step can result in a denial. For example, buying a splashy new car on credit shortly before filing in hopes that this debt will be discharged could have the courts examining you for fraud. Additionally, your tax refund is an important point to consider. Here’s how to avoid complications.

Timing Bankruptcy to Protect Your Refund

When you file for bankruptcy, particularly Chapter 7, certain assets may be seized and liquidated to pay off creditors before your debts are discharged. Items that are designated as “exempt” can’t be touched, however. The federal exemption limit is over $10,000 per person. Since most refunds are less, you will likely get to keep the money.

If you plan to use the federal exemption for another purpose, such as hanging on to your house, you will exceed the $10,000 limit. You can then no longer exempt your tax refund. If this is the case for you, put off your bankruptcy filing until the refund has been spent.

Using Your Tax Refund Without Risk 

Say you borrowed money from your sister and planned to pay her back with your tax refund. Your sister is technically considered a creditor. Bankruptcy prohibits “preferential treatment” of one creditor over another.

Paying your sister out of the refund instead of letting the court-appointed trustee handling the bankruptcy divvy up these funds is thus considered unfair. If you paid her within 90 days of your filing, the trustee could actually take the money back. If you plan to file for bankruptcy within the next 90 days, don’t use your refund to pay back relatives for money they have loaned you. Instead, consider spending the refund on basic household expenses.

Bankruptcy laws vary from one jurisdiction to the next, so consult a lawyer before filing. For help in Genesee County, NY, trust Daniel R. McComb Attorney at Law. With over 35 years of experience, this attorney is used to handling complex cases. He will communicate your options to you openly and honestly, cutting through legal jargon. Request an appointment via the online form or by calling (585) 343-2250.