Will Bankruptcy in New York Affect My Tax Refund?

Filing for bankruptcy can be a stressful and overwhelming process, and the last thing anyone wants is for their tax refund to be impacted by their financial situation. If you’re a New Yorker who is currently struggling with debt, you may be wondering whether your tax refund will be affected by a bankruptcy filing. This is a valid concern, as tax refunds can be a significant source of income for many individuals and families. Additionally, bankruptcy can be a complex and confusing process, and it’s not always clear how it will impact other areas of your financial life.
Does Bankruptcy Affect My Tax Refund?
Different states have their own way of handling things, so even if you know how it works in one state, you may not know how it works in New York. When it comes to bankruptcy in New York, a bankruptcy trustee can take your tax refund in order to pay your debts. However, the frequency of this occurring will depend on various factors, including whether you file for Chapter 7 or Chapter 13 bankruptcy.
Chapter 7 vs. Chapter 13 for Bankruptcy Tax Refund
When you file for Chapter 7 bankruptcy, you only have to take money from your tax refund one time. This is because, after this first payment, everything you earned is yours. So, if you file for bankruptcy in January 2023, and get a tax return in May 2023 for the previous year, the entire amount of that tax refund will be part of your estate.
However, going through Chapter 13 instead will give you bankruptcy trustee access to your tax refunds for multiple years after the initial filing. This will continue to happen until you have finished your payment plan.
Chapter 7 liquidates all assets that are not exempt, leaving you with no debts but also only enough to adequately live and work. Meanwhile, you get to keep your assets under Chapter 13, but as discussed above, you must make a payment plan until your debts are cleared. Between Chapter 7 and Chapter 13, Chapter 7 is the more common option for people to take.
There’s a good reason why people tend to choose Chapter 7 over Chapter 13. Basically, people simply cannot afford to have a payment plan and need their debt eliminated as soon as possible. Thus, Chapter 13 is only an ideal choice if you can afford to take it. This means that you will likely not be able to receive your tax return until the repayment plan ends; however, the impact of losing non-essential assets under Chapter 7 is probably going to be more financially harmful.
Is There Any Way To Exempt My Tax Refund?
If you’re hoping to avoid your tax refund being garnished to pay off your debts, it is not out of the question that you might be able to save it. However, whether you can do so will depend on multiple factors. Be sure to consult with a bankruptcy lawyer Brooklyn, who can help determine if they can save you any money on your tax returns.
There are two standout ways for your tax refund to not be affected by your bankruptcy filing. The first is determined by the size of the tax refund. In this case, it is possible that the trustee may deem it too trivial to bother with. This is not especially likely, and it is not something you are capable of influencing, so it’s moot. The other option is to go with cash exemptions, which certain states, such as New York, allow.