Tax time is here again and this is also the time of year that people struggling with debt consider bankruptcy. It is important to understand the interrelationship between taxes and Bankruptcy.
First, filing and collecting your tax refund can give you the money you need to hire an attorney to file your bankruptcy. So consider this if you are plagued with debts before you spend your refund check.
Second, if you are thinking about filing bankruptcy, it is usually best to have already filed your taxes and collected any tax refunds due to you before you file. At a minimum, you need to estimate what your tax refund will be. You want to make sure that your all of your property, which includes cash on hand or tax refunds owed to you, can be adequately sheltered by the exemptions you elect to use with your bankruptcy filing. You are going to elect either the Oregon exemptions or the Federal Exemptions. In some situations it may be necessary to collect your tax refund and use it to purchase or repair exempt assets before you file your bankruptcy so you can maximize your retention of assets.
It is perfectly acceptable to collect your tax refund in advance and use the money for your bankruptcy attorney fees, your living expenses, or needed medical care. You can also use your tax refund to buy or invest in exempt assets. For example, you might want to use the money to repair a home that is otherwise exempt. You might use the money to buy a car which will be exempt or to repair an exempt vehicle that you already own. The trap you want avoid is having a tax refund owing that is more than the exemptions you can claim and losing that tax refund money to the trustee.
There are some expenditures that you don't want to use your tax refund money on. Large payments to creditors right before filing your bankruptcy may be attacked by the trustee. Large payments on debts within 90 days of filing can be set aside and the trustee will grab the money and redistribute it to all your creditors on a more equitable basis. If you give the money to a business associate, friend, or family member to pay back a debt, the period of potential trustee scrutiny can be as long as a year. Spending excessively on luxury items, trips and vacations right before filing bankruptcy could result in the bankruptcy court finding that you are abusing the bankruptcy process and dismissing your case. So getting legal advice as to what types of expenses are acceptable and how to move your money and property around to maximize your use of the exemptions is an important pre-filing step.
The best thing to do is to consult with an attorney prior to making the decision to file a bankruptcy. Once you have filed it may be too late to get help. You generally won't be allowed to dismiss your bankruptcy and start over either. Once the bankruptcy trustee realizes that there are assets that the trustee can seize and use to pay creditors, the trustee is unlikely to consent to a dismissal of the case.