Receiving tax refunds can be a relief, especially when you need a financial boost to cover home expenses. However, if you are considering filing for bankruptcy, doing so while expecting or holding a refund can be a timing minefield. Here are five common mistakes you should avoid, so you can understand how these can derail your case.
Spending on luxury or non-exempt items
Spending all your tax refund on expensive vacations and luxury goods before filing can be a major red flag. The bankruptcy trustee can view this as hiding or wasting assets that should go to creditors. They may seek to claw back funds or liquid assets to pay your debt.
Making preferential payments
Bankruptcy laws aim to maintain equity among creditors. If you pay a loan from your relative but avoid settling your credit card bill, the trustee can view this as a preferential transfer. They can sue the person you paid to take that money back and distribute it among your other creditors.
Misunderstanding exemptions
Failing to list your tax refund with an exemption in your paperwork can cause issues. The trustee can legally take it from you, even if you have already spent it. Moreover, they may demand that you pay that equivalent value into the estate or object to your discharge.
Commingling funds
Commingling funds can complicate your ability to prove which money is exempt. This can make your refund lose its exempt status, potentially leading to a dispute with the trustee over whether the funds are protected.
Timing your filing strategy
While it is tempting to handle the paperwork yourself to save money, errors can lead to the loss of assets or the dismissal of your case. Before you deposit that check or sign a filing, reaching out to an experienced attorney can give you the guidance you need to move forward.
