Will I Lose My Tax Refund If I File for Bankruptcy in Florida?

Bankruptcy filings tend to climb every spring, and it is not a coincidence. Many people wait until after they file taxes to see whether a refund is coming before deciding on a filing strategy, while others worry that filing at the wrong time will hand their refund straight to a bankruptcy trustee. Both concerns are reasonable, because a tax refund is treated as an asset in your bankruptcy case, and whether you keep it depends on timing and exemptions.

Your Refund Is Part of the Bankruptcy Estate

Once you file for bankruptcy, everything you own or are owed as of the filing date becomes part of your bankruptcy estate, and that includes a tax refund tied to income you earned before you filed, even if you have not received the check yet. In a Chapter 7 case, a trustee can claim the non-exempt portion of that refund to pay creditors. In a Chapter 13 case, an unexpectedly large refund can sometimes affect what a trustee expects you to contribute to your repayment plan.

Florida’s Exemptions Can Protect It

Florida does not allow filers to use the federal bankruptcy exemptions, so protecting a refund comes down to the state’s own exemption scheme. Florida law provides a personal property exemption, along with a larger wildcard exemption available to filers who are not claiming the state’s homestead exemption, under Section 222.25 of the Florida Statutes. Many filers use this wildcard exemption to protect some or all of an anticipated tax refund, along with cash, vehicle equity, or other property that does not otherwise qualify for a specific exemption. If your refund exceeds what the wildcard can cover, and you have other property competing for that same exemption, the leftover amount could be at risk.

Timing Can Work in Your Favor, But Be Careful

Some filers choose to wait until after they receive and reasonably spend down a refund before filing. Reasonable, defensible uses of a refund before filing typically include:

• Paying rent, a mortgage payment, or past-due utility bills
• Covering necessary medical or dental care
• Repairing a vehicle you rely on for work or family needs
• Buying groceries or other everyday essentials
• Paying down a secured debt tied to property you intend to keep

That kind of spending can reduce the cash sitting in your bank account on the day you file. What you should not do is use a refund to buy expensive, non-essential items right before filing in an attempt to convert it into exempt property. A trustee can review these transactions, and purchases that look designed to hide assets from creditors can be challenged and unwound.

Because the exemption amount available to you depends on whether you are also claiming a homestead exemption, and because the timing of your filing relative to when you file taxes can change the outcome entirely, this is not a decision to make without guidance. Our West Palm Beach bankruptcy attorneys at Kelley Kaplan Delaney & Eller, PLLC regularly help clients plan the timing of a filing around an expected refund. If a refund is part of your financial picture this year, our West Palm Beach Chapter 7 bankruptcy attorneys can review your numbers and help you decide whether to file now or wait.

Source:

leg.state.fl.us/statutes/index.cfm?App_mode=Display_Statute&URL=0200-0299/0222/Sections/0222.25.html