During the time at the beginning of each year when people are filing their income tax returns and expecting tax refunds, they often wonder if they will be able to keep those refunds if they file for bankruptcy. Sometimes people delay the bankruptcy filing because they are afraid of losing their refunds, and end up having a garnishment continue on their salary, or even have their bank accounts seized as they wait.
Will I Lose My Tax Refund?
The answer is that usually tax refunds can be kept, but there are situations where this may not be the case. What a person can keep as they go through bankruptcy depends on what are called exemptions, which are things that one can keep in a bankruptcy. Such things as household goods and wearing apparel, if of usual value, can be kept. You can usually also keep your pension benefits, a car if it is not too valuable and most life insurance policies.
The exemption that comes into play when tax refunds are coming is the exemption for cash assets. The amount of cash assets, which include bank accounts and tax refunds, is different in different states.
In New York a debtor can choose between two lists of exemptions: the ones provided by the state of New York, and another list, called the federal exemptions, provided in the Bankruptcy Code itself. This choice is absolute, though – you use either one or the other list. You cannot choose some from one list and some from another.
Federal vs. New York List of Exemptions
New York Exemptions
Except for the exemption for real property, the federal list is more generous. Under the New York list, you can exempt the equity in real property that serves as your home, whether it is a house, condo or cooperative apartment, for up to $150,000 in the downstate counties of New York. (The amount is less upstate.) Under the federal list the exemption for a home limited to $22,975. Thus, if you need to use an exemption for a home of over $22,975, you will need the New York exemptions. The downside to using the New York exemptions to keep your home is that if you do so, you cannot exempt any cash assets at all. In such a case, if you are anticipating a tax refund, it would be best to wait until it arrives, and then until it has been spent, assuming you spend it for usual household, family expenses.
There is an exemption on New York’s list for cash, but it can only be used if you do not use the exemption for real property that is your home. And, it is limited to $5,000. If you are not exempting a home, there is no reason to use the New York exemptions, because under the Federal exemptions, you can exempt up to $12,725 in cash assets. (There is one reason to use New York exemptions absent real property, and that involves large cash value in a life insurance policy. This exemption is more generous under New York’s list, and you can use it for the insurance and still take $5,000 in cash assets.)
Under the Federal list, you are allowed up to $22,975 for the equity in a home. If you don’t use all of that, or don’t use any of it, you can use the rest of the $22,975 that was not used, but only up to $12,725, for anything you like. This is called the wild car exemption, and, although this exemption can be used to cover anything, it is what is used to protect cash assets.
Remember, all of your cash assets have to be brought under this exemption. This includes money you already have in the bank (and the money tied up in your apartment deposit). The remainder of the exemption can protect your tax refunds.
One important thing to remember is that you have to claim the exemption to keep your tax refund. Recently I was reviewing a filing done by a petition preparer who was not an attorney. This person could not understand why she had to give up her tax refunds, and learned that she should have been able to keep them only when she talked to a colleague who had also filed for bankruptcy. As I looked at her papers, I saw that she had not claimed the exemption. It is not automatic – you have to claim it.
All of this may seem highly technical, and it can be. As always, it is best to consult an attorney versed in bankruptcy law to discuss your particular situation.