Ah yes . . .January is over, February has slapped us in the face and is sitting back and laughing about it, and the W-2s have bloomed. Unless I miss my guess, it must be tax time again. And for many people, that means that a refund is in the cards.
But wait . . .says a client . . . I’m filing bankruptcy!! WHAT ABOUT MY REFUND??? Are they going to take that? Well . . .your’re going to hate me for this . . .it depends.
It depends on how much you are expecting to receive and on how much of it (or even all of it) can be exempted under the available exemptions. Let’s say you are expecting to receive about $5,000.00. But you are just on the verge of a bankruptcy filing; all that’s left to do is go to your lawyer’s office to review your petition and schedules, and sign it. And let’s say that you own your house, and by some miracle (in this climate!) you actually have some equity in it . . .for this example, let’s say you have in the neighborhood of $10,000.00 in net equity. (Net equity would be what you get to put in your pocket after the mortgage, the broker’s commission and all closing costs have been paid). Under the federal exemptions you are permitted to keep up to $21,975.00 in equity in your house; in this example, after exempting (keeping) your $10,000.00 worth of equity, about $11,625.00 remains. In Pennsylvania, we can choose whether to use the federal exemptions or the state exemptions. Using the federal exemptions there is good news!!
The Bankruptcy Code allows you to use up to $11,500.00 of the unused portion of the amount you were allowed to use for your house. So, under this scenario, you would be able to keep your tax refund. Using the same analysis, if you have no equity in your house, or if you don’t have a house, then you would still be able to use the unused portion of the homestead exemption, and you would be able to keep your tax refund.
Of course, the above example is just a hypothetical situation, and there are other factors that each individual client may have to consider when looking at the exemptions. This is just one reason why there are no easy answers in bankruptcy!