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Will I Lose My Tax Refund If I File Bankruptcy In Utah?

Many bankruptcy filers are concerned about forfeiting their tax refund. What happens to your tax refund depends on when you file and which chapter. In chapter 13, the debtor makes monthly bankruptcy plan payments for a period of 3-5 years. Unless debtor's plan proposes to pay off 100% of unsecured debt through these payments, the trustee is entitled to confiscate a portion of debtor's refund each year the debtor is in bankruptcy. Currently, in Utah, a debtor is entitled to keep $1,000 each year, plus an additional $1,000 each year if the refund includes the EITC or ACTC (earned income or additional child tax credits). The rest must be paid to the trustee for distribution to creditors. For chapter 7 filers, it works differently. A chapter 7 case in Utah often only lasts for a number of months. A typical no-asset chapter 7 case filed in March may be closed in June, and this fortunate debtor will not be asked to surrender any tax refund because the previous year's refund was already received and spent (assuming the taxes were filed and the refund was received prior to filing the bankruptcy), and the following year's refund will be received long after the closure of the bankruptcy case. Typically, in Utah, chapter 7 trustees begin asking for debtors to surrender the tax refunds for cases filed in September or later. This is because the case will likely still be open at the time tax returns should be filed. However, the trustee must allow you to keep a portion of your refund pertaining to the prorated portion of the taxable year that you were in bankruptcy. For example, if you filed your bankruptcy on December 1st of 2010, the chapter 7 trustee will likely require that you surrender your 2010 tax refund once you receive it. However, the trustee must allow you to keep 1/12th (one month out of twelve) of the refund since you will have been in bankruptcy for the month of December. This of course means that if you file your bankruptcy at the beginning of the year, but still haven't received your tax refund, you will lose all of it. The only way to avoid having a chapter 7 trustee confiscate your tax refund is to receive the refund and spend it appropriately prior to filing for bankruptcy.