Timing is critical when filing a chapter 7 bankruptcy case. If you are wise, you can get out of debt and still be able to protect your much needed tax refund. The key is to file either several months before or several months after your tax refund is either expected or received. The problem is when the refund is received too close to filing chapter 7 bankruptcy or it has not yet been received and you are appearing before a chapter 7 panel trustee who was inquiring as to your refund. Let’s examine the first scenario:
The bankruptcy trustees are typically looking for tax refunds in close proximity to when refunds are issued by the federal government. Thus, if you file for bankruptcy several months in advance of tax season, your bankruptcy trustee is not likely going to inquire as to what refund you are going to be receiving. For this reason, you will be able to eliminate your debt and still protect your future tax refund because the trustee has moved on to other cases and is not holding your case open to find out what kind of refund you are going to be receiving.
The second scenario is when you file several months after your tax refund is received. In these situations, the trustee may or may not inquire as to whether or not you received a refund. If you did receive a refund, it is likely that you exhausted those funds on living expenses and other creditors prior to your bankruptcy case being filed. The problem would be is if you have those funds available in a bank account and they were not yet exhausted. If that were the case, the trustee could determine the refund to be property of the bankruptcy estate and want it turned over for the benefit of creditors. If the money is already spent, there is nothing for the trustee to latch on to.
The biggest mistake occurs by those who file on their own also known as pro se. These debtors have no idea as to what the trustee is going to be looking for and they have no idea as to when the proper time to file is when there is substantial tax refund in issue. I have seen many pro se debtors lose their entire refund because it could not be protected under current Illinois law. They may have used their four thousand dollar wildcard exemption on other property and thus there was nothing left to protect the
