The good news: you can plan how to spend your 2020 tax refund before you file your 2021 case and you won’t lose it.
The bad news: you have to spend your 2020 tax refund before you file your 2021 case or you’ll lose it.
Utah provides no statutory protection for tax refunds. Once you receive a tax refund, any creditor with a valid judgment (a Chapter 7 trustee steps into the shoes of a judgment creditor) can reach and garnish your tax refund. Our state legislators have not put a priority on protecting your tax refunds, including refunds from earned income and additional child tax credits, from creditors. You will need to plan how to spend the refunds before we file your case.
There are many ways to spend your tax refund on “reasonable and necessary living expenses” before your case is filed. This way, you preserve your refund for your own use rather than surrendering it to the bankruptcy trustee.
Here is a quick list of some “reasonable and necessary living expenses,” but by no means a full list, about how you spend your refund -- it all depends on your individual needs and circumstances and we can discuss your options when we meet:
Buy clothing and food storage items
Pay for new tires or other needed car repairs
Buy or upgrade appliances or furniture – new mattresses, washer, dryer, etc.
See your doctor or dentist!
Pay your bankruptcy attorney
More importantly, don’t (a) try to hide it under the floorboards and try to say that it has been spent, (b) make large payments on loans you’ve taken from friends and relatives, or (c) splurge and spend it on luxury items like new recreation equipment, travel or jewelry.
Many clients have a difficult time, emotionally, spending down their refunds before filing a bankruptcy petition. Many people treat their annual tax refund as a saving cushion against unexpected expenses in the coming year. If you need to file now, this strategy won’t work and you need to make a different plan for your refunds. Next year, you’ll be able to retain your refunds and won’t have all the debt that is currently keeping you awake at night.
If you have questions about how to protect your tax refunds in Chapter 7, call our office to review your options.