If you are considering filing a Chapter 7 bankruptcy case in the near future, and you expect a tax refund from the IRS or State Franchise Tax Board, you need to be aware that tax refunds are treated as an asset in Chapter 7 bankruptcy.
When a bankruptcy case is filed, the forms must list all the debtor’s assets. Those assets are listed either on the “real” property schedule or the “personal” property schedule. Additionally, there is a Schedule where all the debtor’s allowed exemptions will be listed. The exemptions are what will protect the debtor’s property from the bankruptcy trustee. Any assets that are not exempted can be liquidated by the bankruptcy trustee assigned to the case.
In California, there are two sets of exemptions codes. The debtor must choose one or the other. If the debtor does not have equity in a home (or a small amount of equity), it is generally better to choose the “703” code (which refers to California Code of Civil Procedure Section 703.140). The “703” code offers greater protection for bank accounts, stock accounts, and tax refunds. It also has a higher protection amount for vehicles.
If you are expecting a tax refund that will likely arrive after your bankruptcy case is filed, you must list the expected amount as a personal property asset and then exempt that amount on the exemption schedule. If the allowed exemption amounts are not high enough to cover all your assets, including the tax refund, you may want to reconsider the timing of the bankruptcy filing.
If the tax refund is received prior to the filing, it will be in your bank account, which is also an asset, so it would still need to be protected although it would now be listed as an amount in the bank rather than as an expected tax refund.
California recently raised some of the exemption amounts in the “703” code, so it is now a little easier to protect assets such as bank accounts and tax refunds. Nevertheless, it is important to discuss with your attorney all your assets, including those which you expect to get, but have not yet received.
For more information or a consultation, please call 661-210-5657, or e-mail mjf4bk@ca.rr.com.