Can I use My Tax Return to File Bankruptcy in Ohio in 2020?
Anyone that is thinking about filing bankruptcy knows that it comes with a cost. When the decision to file falls around tax season, the good news is that there are ways to protect the tax refund.
But first, it’s a must to understand the factors that determine whether or not a refund can be retained. Two of those factors are the use of Ohio exemptions and when the refund is received. Of course, this is something that ya bankruptcy attorney can help with so everything is taken care of correctly.
The Refund and Chapter 7 Bankruptcy
When a person files Chapter 7 bankruptcy, a trustee liquidates any non-exempt assets so the money acquired from those assets are used to pay off creditors. Many people filing Chapter 7 don’t have non-exempt assets, which means they lose nothing. However, a tax refund is classified as an asset that can be used to pay off delinquencies.
When a tax refund can’t be exempted, the amount of money that is not protected by the exemption rules must be given to the trustee to pay debts. Failing to hand over the portion of the refund that isn’t exempt will result in revocation of the bankruptcy discharge, which means the debtor is once again responsible for their debts.
To exempt a tax refund, the following must be done:
1. Go over the available tax refund exemptions with a bankruptcy attorney.
2. If a debtor knows that they will be filing at some point, withholding can be reduced so the refund is smaller.
3. Use the refund to do such things as make home repairs, pay rent, pay medical expenses, or make necessary purchases.
4. List the refund in the bankruptcy exemptions.
The Refund and Chapter 13 Bankruptcy
A debtor doesn’t have to give up assets to satisfy debts when filing Chapter 13 bankruptcy. Instead, a payment plan is established to pay all or part of the debt.
When it comes to the tax refund, it can be used to determine how much money must be paid back to creditors. All disposable income must be used toward the payment plan, which means the tax refund is subject to this. However, the law allows for the modification of the repayment plan to exclude the use of tax refunds. For instance, a motion can be filed to retain the refund for the payment of living and other necessary expenses.
When making a motion to retain a refund, it must be specified which refund is to be excused, the refund amount, and why the money is needed. Car repair, heating and air repair, rent payments, and medical expenses are examples of qualifying reasons.
Important Tax Tips When Filing Bankruptcy
It’s a good idea to file taxes before filing bankruptcy if the refund is going to be small. When a refund is going to be large, filing taxes after works fine. However, tax refunds must be handed over to the attorney after filing bankruptcy with an explanation of how the refund was used.
If a refund has been received before filing bankruptcy, it’s important to not pay bills with the money or it slows down the bankruptcy case. It is, however, possible to pay the attorney fees and court costs with the refund money.