When filing for bankruptcy in Kansas or Missouri, one of the common concerns is whether you will be able to keep your tax refunds. Here’s what you need to know about how tax refunds are treated in both Chapter 7 and Chapter 13 bankruptcy cases.

Chapter 7 Bankruptcy:

In Chapter 7 bankruptcy, your tax refund is generally not protected. This means that if you file for bankruptcy and later receive a tax refund, you may be required to turn over all or part of your refund to the bankruptcy trustee.  You are usually only required to turn over one year’s tax refund.

Kansas:

  • Kansas has an Earned Income Credit (EIC) exemption, which is designed to protect the portion of your refund that is attributed to the Earned Income Tax Credit.
  • However, the general portion of your refund that is not associated with the EIC is not protected.

Missouri:

  • In Missouri, tax refunds are also not specifically protected in Chapter 7 bankruptcy cases.
  • Missouri allows debtors to retain the portion of their refunds attributed to the Earned Income Credit (EIC) and Child Tax Credits, which is designed to protect the portion of your refund that is attributed to the Earned Income Tax Credit.
  • Missouri allows debtors to use a wildcard exemption to protect at least a portion of their tax refund. This wildcard exemption can be applied to various types of personal property, including tax refunds, but the exact amount you can protect will depend on the value of other property you are exempting in your case.

Chapter 13 Bankruptcy:

In Chapter 13 bankruptcy, the treatment of tax refunds depends on the specific circumstances of your case.

  • Kansas and Missouri both allow the debtor to keep tax refunds in Chapter 13 bankruptcy, but the refunds may be used to fund the repayment plan.
  • If you receive a refund during the course of your Chapter 13 case, you may be required to pay it over to the trustee, or you may be allowed to keep it, depending on the plan and the discretion of the court.
    • The trustee’s will consider how much is being paid to unsecured creditors and if any arrears are owing in your case.

General Tips:

  • For Chapter 13 debtors, it’s advisable to spend down your tax refunds on approved expenses (e.g., necessities) before filing your bankruptcy case, to avoid paying it over to the trustee.
  • You should also review your withholdings to avoid overpaying taxes throughout the year, as this could lead to a large refund that might be taken during bankruptcy proceedings.

What Can You Do with Your Tax Refund?

If you’re considering bankruptcy in Kansas or Missouri, tax season might prompt you to evaluate how your refunds will be affected. It’s actually a good time to schedule a free consultation with a bankruptcy attorney to discuss your options.

You may also use your tax refund to cover bankruptcy filing fees or the cost of hiring an attorney, which can be a strategic way to use those funds while minimizing the risk of losing them to the trustee.

Conclusion:

  • Chapter 7 Bankruptcy: Tax refunds are generally not protected, though Kansas and Missouri provide some protections for Earned Income Tax Credit (EIC) refunds, and Missouri allows a Child Tax Credit protection and wildcard exemption.
  • Chapter 13 Bankruptcy: Refunds may need to be paid over to the trustee, but how much depends on your specific repayment plan.
  • It’s a good idea to plan your withholdings carefully and consult with an attorney to ensure that your tax refunds are properly managed during your bankruptcy case.

If you’re unsure about when to file your bankruptcy case, contact our Kansas City bankruptcy attorneys for personalized guidance and to explore your options.