How Does Bankruptcy Affect Your Tax Refund in Arizona?

how does bankruptcy affect your tax refundWhat happens to tax refunds during a bankruptcy? That’s a valid question but to get a reliable answer, you need to understand there are different types of bankruptcy. The effects will be different in the cases of Chapter 7 and Chapter 13 filing.

Tax Refunds and Chapter 7 Bankruptcy

Chapter 7 bankruptcies are liquidation proceedings in which non-exempt property and assets will be used to pay off priority debt.

Naturally, people wonder whether their tax refunds will be used for the purpose.

To know the answer, you will have to determine whether the return is produced from income earned before or after the filing. If you have a return that’s the result of income you earned after the bankruptcy will be yours to keep.

Tax refunds that are based on income you earned before the bankruptcy will be included in the bankruptcy estate for liquidation purposes. It doesn’t matter if you receive the sum before or after the date of the bankruptcy filing, the rule is still in place.

There are a few ways in which you can keep a refund. The first one is to use the amount on necessary expenses (not just on buying anything because such behavior could be considered bankruptcy fraud). A bankruptcy exemption could also be used to protect a certain amount.

In Arizona, tax refunds are not protected under a state bankruptcy exemption. You could, however, benefit from a federal exemption in a few instances. The federal wildcard exemption is set at 1,250 dollars plus up to 11,850 dollars of the unused portion of the federal homestead exemption.

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Tax Refunds and Chapter 13 Bankruptcy

The Chapter 13 bankruptcy features the creation of a payment plan that’s based on your disposable income. The aim here is to cover a portion of your debt. A Chapter 13 payment plan is valid for a period ranging from three to five years, after which remaining debt will be discharged.

To address the tax refunds question, you will have to learn whether the sum is included in your disposable income calculation.

Disposable income is a term that refers to the amount left after you pay all of your monthly necessary expenditures (food, medicines, transportation, rent, utilities, etc.).

If you do not include the tax refunds in the payment of essentials, the bankruptcy trustee will count the sum towards your disposable income. Hence, the payments you will have to make under the Chapter 13 plan will be higher than in the instance of having no tax refunds or using the money to cover essential expenditure.

Thus, the simplest way to exclude a tax refund from the disposable income calculation is to show that it’s needed to make necessary payments. Usually, however, people find it very difficult to justify their desire to keep the sum.

Because a Chapter 13 payment plan lasts for several years, it will affect you on an annual basis.

You have the right to file a plan modification every single year. In this modification request, you can petition the court to exclude the tax refund from the disposable income calculation. A valid reason will have to be presented for the petition to be considered in court.

A tax refund will be excused only in instances when your living expenses increase and you have to use the money to cover the essentials.

If your car breaks down suddenly, for example, the court may allow you to use the tax refund to cover the cost of the repairs.

As you can see, individual circumstances will play a role each time. This is why you need to hire a skilled Arizona bankruptcy attorney. Your legal representative will examine your income, advise you about the best type of bankruptcy filing and the ways to keep funds or valuables that you need.