Spending Tax Refunds before Filing

If you have received your tax refund and have not yet filed for bankruptcy, you can keep the money out of your bankruptcy estate by spending it. The trustee cannot use money to pay your creditors that you no longer have.

Use Tax Refunds for Reasonable and Necessary Expenses Only

Your trustee is likely to ask you to what you spent the refunds on, so it’s a good idea to hang on to receipts and keep an accounting, so that you have the information ready if your trustee requests it. You should only use your refunds for reasonable and necessary expenses. If you spend your refund frivolously, such as on luxury purchases or travel, you may have issues with your trustee or creditors.

If you spend your tax refund before you file for bankruptcy, make sure you spend it on necessary items. Approved expenses include:

  • mortgage payment, rent, or home repair
  • utilities
  • food
  • clothing
  • medical care
  • car payments, maintenance, or
  • education.

Expenses that are not allowed include:

  • luxury goods
  • repayment to a friend or family member, or
  • repayment of one credit card.

If you buy luxury goods, the trustee could seek to deny your discharge because of bad faith. If you pay back one of your creditors and ignore the others, the trustee may find that you have made a preferential payment. This means that you have favored one creditor over another. The trustee can force the person or company who received the money to return it to the estate. Therefore, if you spend your tax refund, make sure to spend it on necessary expenses. In addition, keep very good records of how you used the money. 

Exercise Caution if Using Tax Refunds for Normal Living Expenses

While normal living expenses, such as rent and utilities, may be reasonable and necessary, be cautious about using your refund for those expenses if you have monthly income with which you normally pay those expenses. If you spend your refund on regular monthly expenses, it may cause your trustee to question how you spent your regular monthly income.

Do Not Use Tax Refunds to Repay Friends or Family

You should avoid using your tax refunds to repay debts owed to friends or family members. If you do so, you create a “preference,” which means you spent money on friends or family members instead of repaying your creditors, who are legally entitled to payment. Your trustee can go after your friends or family to recover the money and give it to your creditors. 

A Tax Refund Is Part of Your Bankruptcy Estate

When a debtor files for Chapter 7 bankruptcy, all of the person’s assets become part of the bankruptcy estate. The Bankruptcy Code defines assets very broadly. It includes more than money in the bank or property, such as a car. A tax refund is an asset that the trustee can use to pay unsecured creditors. It is very likely that the trustee will ask about a tax refund at your.

In Chapter 7 bankruptcy, the trustee can use the assets you have when you file for bankruptcy to pay off your creditors. You can keep any assets you receive after filing for bankruptcy, however. A tax refund can be tricky because it often involves a process that begins before the bankruptcy filing date and continues afterwards.

Contact Beehive Advocates

To schedule a free initial consultation , call (801) 432-2975 or fill out our contact form today.

We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.

Hits: 493



(801) 432-2975
10907 South State Street
Sandy, Utah 84070



Beehive Advocates, Co. BBB Business Review