Advertiser Disclosure

Will Bankruptcy Affect Your Tax Refund?

Home > Bankruptcy > Will Bankruptcy Affect Your Tax Refund?

You’ve filed for bankruptcy, but could really use that tax refund you expect this year.

You’re not the only one who wants it.

Odds are the bankruptcy trustee is also eyeing the money to use to pay your creditors and, in many cases, the bankruptcy trustee will take your tax refund after discharge.

There are options that give you a chance to keep some or all of your tax refund, but they’re complicated, rely on knowing how to make the best use of exemptions, which kind of bankruptcy to file and more.

If you’re considering bankruptcy, but haven’t filed yet, there are other steps you can take to preserve your refund. That’s complicated, too, and can affect your chances for obtaining a bankruptcy discharge.

Let’s see if we can untangle the issues for you and help you keep that tax refund.

Can a Bankruptcy Trustee Take Your Tax Refund After a Discharge?

There are two types of bankruptcy for individuals, Chapter  7 and Chapter 13. The bankruptcy trustee can keep your tax refund in both, though with Chapter 7 it will happen only once. With Chapter 13, it can happen every year of your repayment plan.

Nearly two-thirds of Americans who file for bankruptcy, file Chapter 7. Your non-exempt assets are liquidated. You start new with no debt, but only those assets necessary to live and work.

Under Chapter 7, you may lose the first tax refund that’s due after discharge, or some of it, because it’s a refund of money earned before discharge.

If some of the refund is from income earned after filing for bankruptcy, you keep it. For instance, if you filed for bankruptcy on June 30, 2020, and your income didn’t change the entire year, half of the refund may go to the trustee and half to you. If you filed for bankruptcy near the end of the year, nearly all of it could go to the trustee. There are also variations if you’re married, depending on how you filed your taxes (jointly or separately) and whether both of you filed the bankruptcy.

The good news is that you only lose the tax refund once, since any refund on income earned after a Chapter 7 bankruptcy belongs to you.

With Chapter 13, you keep your assets, and you, the court, the trustee and your creditors agree to a repayment plan based on your monthly income. Any “surplus” income goes to pay the debt.

You may have to wait until your repayment plan ends to keep your tax refund. This would depend on whether your repayment plan requires you to contribute your tax refund or not. This can vary depending on which district you filed your bankruptcy in but can also vary from case to case.

If you haven’t filed yet, it’s a good idea to hire a lawyer who specializes in bankruptcy to help you determine how best to navigate the process.

How to Keep Your Tax Refund in Bankruptcy

One way to keep your tax refund after bankruptcy is by making the best use of the exemptions allowed by federal and state governments.

The exemptions are designed to make sure people who file for bankruptcy have what they need to live on – housing, a car for work, work equipment, and financial assets like Social Security, pension payments, veterans benefits and retirement savings.

Things that may not be exempt are bank accounts, stock investments, a second car or home, collections, jewelry and other luxury items.

A tax refund is extra cash, so it may not be exempt. It depends on the exemptions in your state. There may be a way to use exemptions to keep your tax refund in bankruptcy.

If you’ve filed for Chapter 13, it’s a little trickier and involves setting up your payment plan in the right manner.

Another option is to take action before you file for bankruptcy.

Use Exemptions

The best exemption to use varies from state to state. In many states, the best option to keep your tax refund is the “wildcard” exemption, which can be used to keep any non-exempt item. There is a dollar limit. The federal wildcard exemption until April 2022 has a $1,325 limit.

The federal government also allows a value of up to $12,575, aside from the wildcard, in unused exemptions that can be used for nonexempt items. For example, if your tax refund is $2,000, you can use the wildcard and another $675 from the unused exemption pool to claim it. That’s if you haven’t used the exemption money and wildcard on your house, car, work equipment and other necessary exempt items.

Aside from the federal exemptions, some states also have wildcard exemptions, but they vary widely. Some states have quite a bit of wildcard exemption available. Other states don’t have a wildcard exemption at all. Some states require you to use their exemptions. Other states allow you to choose the federal or state exemptions – whichever is more favorable to you.

Use the Right Language in the Chapter 13 Bankruptcy Plan

Chapter 13 is for people with a steady income who make too much money to file for Chapter 7, and rather than liquefy assets, it is based on a repayment plan. You make monthly payments to the bankruptcy trustee, leaving just enough for your necessary expenses. Any surplus money goes to your creditors.

Your tax refund is considered surplus money unless you can convince the bankruptcy court otherwise. The bankruptcy trustee and your creditors can object to any part of your plan, and likely would rather see that money be used to pay what you owe.

In some cases, you can pay more into your payment plan monthly in exchange for keeping your tax refund. In other cases, you may want to keep your payment plan lower monthly and use your tax refund to pay the plan. This depends on your specific case and you should discuss your goals with your bankruptcy attorney.

You may also be able to keep a tax refund if you have a necessary emergency, like a car repair, a medical bill or your water heater dies. In that case, you would ask the trustee for a plan modification that allows you to keep your tax refund to pay for the emergency.

Adjust Your Tax Withholding

Taxpayers get a refund when more money is withdrawn from their pay than is necessary to cover what they owe in taxes. If you haven’t filed for bankruptcy yet, adjust your paycheck withholding so that only the necessary amount goes to the federal government. This gives you more disposable income in the moment, which you should use for necessary living expenses.

You don’t get a refund, but if you don’t have enough withheld, you’ll owe the IRS when tax time comes around.

Spend Your Refund

Another option if you plan to file for bankruptcy but haven’t yet, is to get your refund first.

If you do that, be sure to spend the money on necessary expenses, like mortgage or rent (though not multiple advance payments), utilities, food, clothes, education and car maintenance.

You can’t spend it on luxury items, to pay back a loan, even if it’s to a family member or friend, or to pay down a credit card.

The reason for the luxury purchase ban is obvious – why are you buying something you don’t need when you can’t pay your bills? The bankruptcy court may deny your discharge for bad faith.

The loan and credit card paybacks may seem like a good idea. But the court considers those “preferential payments,” which means you’ve favored one creditor at the expense of others. The trustee may take that money back to spread it around more equitably among your creditors.

About The Author

Maureen Milliken

Maureen Milliken has been writing about finance, banking, investment, entrepreneurship, real estate and other related topics for more than 30 years. She started as the “Business Beat” columnist for the now-defunct Haverhill (Mass.) Gazette and currently is one of the hosts of the Mainebiz business-focused podcast, “The Day that Changed Everything” in addition to her daily writing. She also is is the author of three mystery novels and two nonfiction books.

Article Reviewed By

Article Reviewed By

Patrick J Best - Bankruptcy Attorney

Patrick J. Best

Bankruptcy Attorney
Certified Financial Planner


  1. N.A. (ND) Bankruptcy. Retrieved from
  2. N.A. (ND) Chapter 7 – Bankruptcy Basics. Retrieved from
  3. N.A. (ND) Wildcard Exemption. Retrieved from
  4. O’Neil, C. (ND) Can I Keep My Tax Refund in Chapter 7 Bankruptcy? Retrieved from
  5. O’Neil, C. (ND) Can I Keep My Tax Refund in Chapter 13 Bankruptcy?