The best time to file for bankruptcy would be immediately after you receive your tax return. This is good planning. By doing this any refund is fully available for you to spend on bankruptcy fees and other things you may need like car repairs, or replacing old, tired appliances.
If you file for bankruptcy later in the year you risk losing a portion of your refund because the bankruptcy court can – and usually will – take a percentage of your refund. For some, who may be under immediate threat of lawsuits or wage garnishments, filing a bankruptcy at the best time may not be an option. This is why it is best not to drag your feet when it comes to making a bankruptcy decision. If you wait until the last minute your options may not be the best financially. A bankruptcy attorney can assess your situation and assist you in making the best decisions.
It is important to note that the “earned income credit” portion of a tax refund is exempt. However, the bankruptcy court trustee can go after your regular refund for overpayment of withholding. Bankruptcy law looks at a refund like it looks at a savings account, so if nothing is in there (no refund coming) there is nothing to attach.
With this in mind, the best course of action would be to change your exemptions so you underpay and not have a refund. When the bankruptcy is done you can go back to normal withholding exemptions if you depend on your annual tax refund for things like auto registrations or other large, once-a-year expenses.
If you have any questions not covered here please contact our office for a free bankruptcy consultation.
Dean Ryan is an experienced Bankruptcy Lawyer in Garden City KS and the surrounding Southwestern KS area. For a free bankruptcy consultation call 620-275-9614 during normal business hours.