Will Filing Bankruptcy Affect My Tax Refund in Maryland?

Will Filing Bankruptcy Affect My Tax Refund in Maryland

If you’re facing bankruptcy and expecting your tax refund, you may wonder, “Will filing bankruptcy affect my tax refund in Maryland?” The fear of losing what could be a significant financial recovery asset during a period of financial distress adds to the anxiety and confusion.

In this article, we’ll discuss the basics of tax refunds and bankruptcy, how tax refunds work with specific bankruptcy chapters, and how you can protect your refund during bankruptcy.

Understanding Bankruptcy and Tax Refunds

Bankruptcy is a legal process that helps individuals or businesses repay their debts under the protection of the federal bankruptcy court.

There are three main bankruptcy types you might consider: Chapter 7, which liquidates unprotected assets to pay creditors; Chapter 13, which enables debt repayment over time with a plan; and Chapter 11, which is typically used by businesses to reorganize debts while continuing operations but can also be used by individuals.

When you’re grappling with the question, “Will filing bankruptcy affect my tax refund in Maryland,” it’s crucial to understand that tax refunds are viewed as assets in bankruptcy proceedings.

This is because an anticipated tax refund may represent a significant amount of money that you’re entitled to receive from the Federal and State governments, which could be used to pay your creditors. During bankruptcy, assets are scrutinized to determine how they can be allocated to meet your debt obligations, making your tax refund a point of interest for trustees and creditors.

How Bankruptcy Affects Tax Refunds

Understanding how bankruptcy interacts with your financial assets, like tax refunds, is crucial. The answer to “Will Filing Bankruptcy Affect My Tax Refund in Maryland?” is not straightforward and varies based on the type of bankruptcy you file.

Chapter 7 Bankruptcy and Tax Refunds

In Chapter 7 bankruptcy, your tax refund can become a focal point for trustees looking to gather assets and repay creditors. The reality is that depending on when you file, your tax refund can be seized and used to pay off some of your debts.

However, there’s a silver lining. The Chapter 7 exemptions in Maryland might allow you to protect a portion or even all of your tax refund. These exemptions vary widely and proper pre-bankruptcy planning is essential, so consult with a bankruptcy attorney to explore your options.

Chapter 11 Bankruptcy and Tax Refunds

This reorganization plan in Chapter 11 allows businesses and individuals to keep operating while they restructure their debts. Tax refunds are considered part of the bankruptcy estate.

However, tax refunds can also be used as part of the reorganization plan to repay creditors. It’s crucial to disclose anticipated tax refunds in your filing documents and to work closely with your bankruptcy attorney to understand how your refund can be protected or allocated under Chapter 11 proceedings.

Chapter 13 Bankruptcy and Tax Refunds

Under Chapter 13 bankruptcy, your tax refund may become part of your annual income, which is factored into your Chapter 13 repayment plan.

This means your tax refund could potentially increase your monthly payments, but it also offers an opportunity: if you receive a larger refund than expected, you might be able to adjust your repayment plan or use the refund to pay down your bankruptcy plan more quickly—or to structure a plan that you would not otherwise be able to afford

Protecting Your Tax Refund Before and After Filing for Bankruptcy

Pre-Filing Strategies

Strategically planning your bankruptcy filing date can make a significant difference. This principle applies broadly, but especially when asking, “Will filing bankruptcy affect my tax refund in Maryland?”

Before you file, consider using your tax refund for necessary expenses, such as rent, mortgage, or utilities, as these uses of the refund are generally considered proper by bankruptcy trustees.

This proactive approach allows you to legitimately reduce your available assets (your refund) that could otherwise be seized in bankruptcy.

Post-Filing Considerations

After filing for bankruptcy, how you handle ongoing and future tax refunds can impact your financial recovery.

In Chapter 13 bankruptcy, for example, your tax refund may be considered disposable income and could be required to be turned over for debt repayment. To safeguard future refunds:

  • Adjust your tax withholdings to ensure your refund is minimal. This strategy reduces the amount that can be claimed by the bankruptcy estate, and you will take home more money every paycheck.
  • Understand and utilize any exemptions you may be entitled to, protecting a portion of your refund.

These strategies may help you retain more of your income during this challenging financial period, where every penny counts. 

The Role of a Bankruptcy Attorney in Protecting Your Tax Refund

Bankruptcy can feel overwhelmingly complex and intimidating. A bankruptcy attorney plays a vital role in protecting your financial interests. Here’s how they can help: 

  • Provide personalized advice on how to manage your tax refund before and after filing for bankruptcy, helping you make informed decisions.
  • Help strategize the timing of your bankruptcy filing to optimize the protection of your assets.
  • Aid you in utilizing exemptions and other legal means to protect your tax refund from being fully absorbed into the bankruptcy estate.

Working with an experienced bankruptcy attorney dramatically improves your chances of protecting your financial assets. It should give you peace of mind and confidence throughout a profoundly stressful process. Don’t navigate this complex journey alone; allow a professional to guide you toward the best possible financial outcome.

Key Takeaways

  • Bankruptcy can significantly affect your tax refund, with specifics depending on the type of bankruptcy you file.
  • Chapter 7 trustees may seize refunds to pay creditors; exemptions can offer protection.
  • Chapters 11 and 13 include refunds in repayment plans, with potential plan adjustments.
  • Pre- and post-filing strategies can help protect your tax refunds.
  • The timing of your bankruptcy filing can significantly affect asset protection.
  • Consulting with a bankruptcy attorney early can help protect your tax refund.
  • Speak with a bankruptcy attorney, like Steiner Law Group, to get out of debt and protect your assets.

Facing Overwhelming Debt and Need to Protect Your Assets? Speak to Steiner Law Group

Need help filing bankruptcy or have more questions about “Will Filing Bankruptcy Affect My Tax Refund in Maryland?” Contact us! Schedule a consultation or call us at 410-670-7060 today!

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About Eric Steiner, Esquire

Mr. Steiner graduated from the University of Michigan Law School in 2006. Since then, he has focused his practice on bankruptcy, real estate, commercial and consumer collections, including representing the third largest lender in the greater Baltimore area.