If you’ve been struggling to keep your head above water, bankruptcy can allow you to start the New Year with a clean slate. However, before pursuing bankruptcy protection, you must get all of your finances in order, which means filing last year’s tax returns. Below are a few ways the timing of your taxes can impact your bankruptcy case.

Why You Should File Income Taxes Before a Bankruptcy Petition

Court Requirements

Bankruptcy courts require those seeking protection to submit their most recent tax returns with their petitions. If you’re filing for Chapter 7, you must offer returns for the previous year, along with any that are due during the proceedings. However, those filing for Chapter 13 need tax returns for the last four years. This gives the trustee more insight into your earnings, access to resources, and whether you should receive a refund.

What Happens to Refunds in a Bankruptcy Case

Tax refunds are automatically considered part of the estate, subject to seizure by the trustee who will use it to pay back your creditors. Even if you receive a refund shortly after discharging your bankruptcy, you may still lose it to the trustee.

Keeping Your Tax Refund

Each state allows petitioners to exempt specific property from seizure, including a small amount of cash. In Ohio, this exemption only covers $500, which may not be enough to protect your tax refund. Some states allow a wild card exemption that can cover any personal possessions, but you may want to use that for other valuable items.

For most borrowers, the best way to keep your tax refund is to delay your petition until after you’ve spent the funds. However, the court will examine how you used the money, so use it on necessities like housing, groceries, utility bills, or car repairs. Keeping a detailed account of how you spent it will help avoid problems when filing your petition.

If your debts have become too much to handle, solvency is only a phone call away. For over 27 years, Harry B. Zornow in Hamilton, OH, has guided struggling borrowers through the bankruptcy process to get the second chance everyone deserves. Visit him online to find out how he can help, or call (513) 737-9770 to schedule a consultation today.