Will I Lose My Tax Refunds If I File Chapter 7 Bankruptcy?

Posted by Wesley Scott on March 2, 2022 at 7:30 AM
Wesley Scott

shutterstock_2064971927-1During tax season many of our clients and potential clients are asking that very question. Unfortunately, it is not always a black and white answer. Read more to find out if your refund would be protected.

Exemption Choice

In Minnesota, there are two sets of protections, called exemptions, that can be used when filing a bankruptcy—the Minnesota State Exemptions and the Federal Bankruptcy Exemptions. When determining which exemptions a debtor should use when filing, the first question that we need to answer is whether the debtor is a homeowner, and then if a homeowner, how much equity does that debtor have in his/her home.

Non-Homeowners/Homeowners with Little/No Equity In Their Home

If you fit into this category (not a homeowner, or less than $25,000 in home, or $50,000 for a married couple), then you can use the Federal Bankruptcy Exemptions when you file your bankruptcy. This is good news and usually means that your tax refunds will be protected. The Federal exemptions allow you $13,900.00 to protect anything that you want—money in the bank, cash on hand, otherwise unprotected assets like guns, some personal property, and TAX REFUNDS. In the average case, if you are filing using the Federal exemptions, all, or at least a portion, of your tax refunds will be protected. PLEASE NOTE: the amount that you can protect decreases based on other items that you might own that will also need to be protected, so a consultation is definitely necessary to confirm how much can be protected.

Homeowners with a Large Amount of Equity

If you are in this category you would use the Minnesota State Exemptions when you file, and a portion of your tax refunds MAY BE protected, if there are any Federal Earned Income Credits, or Minnesota Working Family Credits—to be determined on a case by case basis. In most, if not all, other instances, when you file using the state exemptions, the tax refunds are NOT PROTECTED.

My Taxes Are Not Protected, What Should I Do?

This is a really good question, because there are a variety of answers. Usually, the best way to use the refunds prior to filing is to pay your bankruptcy attorney—it is something you would have to pay anyway, AND you would otherwise lose the fund, so getting your tax refund, paying your attorney, and then filing is a GREAT strategy. Additionally, if you are behind on your mortgage or auto loan, catching up with the refund would also be a great way to spend it prior to filing. I recommend speaking with an attorney before doing anything! PLEASE NOTE: It is NOT a good strategy to pay back any relatives or give the money away prior to filing as that can create other problems down the road.


If you are looking at filing, and have questions about your tax refund, we would be happy to discuss them with you! When the time is right, or when you are ready to get your life back, reach out to Minnesota’s most kind and helpful bankruptcy law firm by going to www.lifebacklaw.com. You will be so thankful you did!


Topics: Taxes, Tax Refunds

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