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How to use your tax refund to file Chapter 7 bankruptcy (part 1)

It’s tax season, and that means many people are looking forward to receiving a tax refund. You may have already pocketed yours through an advance loan on your refund. When you’re struggling to make ends meet, any amount of money can make a big impact.

But what if you’re considering bankruptcy? You should be aware of how tax refunds are handled in Chapter 7 bankruptcies (the most common type of consumer bankruptcy) so you don’t end up losing your refund. Through careful planning, you can use your refund to the greatest advantage possible rather than surrendering it to bankruptcy.

Understanding exemptions in bankruptcy

So what happens to your refund in bankruptcy? To answer that, it’s important to understand exemptions. This term refers to property that’s protected from creditors, meaning it won’t be sold or applied in bankruptcy to satisfy your debts.

You can claim exemptions under either federal or state law. Texas offers more generous exemptions than federal law; our state is considered highly favorable to debtors. Texas bankruptcy exemptions include:

  • Your home: an unlimited value, up to a certain acreage limit
  • Your vehicle: one per licensed household member
  • Personal property: up to a certain dollar amount
  • Retirement accounts and pensions: provided they meet certain qualifications

Income is not part of these exemptions – including income you’ve earned but not yet received. That means tax refunds. If you have any unspent refunds lying around – or if your refund comes through during bankruptcy – it will almost certainly go toward your debts. You won’t see a cent.

Fortunately, there are ways to protect your refund. In part 2 of this series, we will address how to use your refund strategically.