Does Filing Bankruptcy Affect Tax Returns? - Bolinske Law
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Does Filing Bankruptcy Affect Tax Returns?

Does Filing Bankruptcy Affect Tax Returns?

The filing of a chapter 7 or chapter 13 bankruptcy protects tax refunds in two ways. First, the filing bankruptcy will stop creditors from capturing tax returns both currently and in the future.  Second, in most cases the money will also be safe from the bankruptcy trustee.


Around tax time creditors routinely try to capture tax refunds. Creditors know that tax return checks are routinely deposited into bank accounts. The typical scenario is a federal and Minnesota State tax return is filed which results in a refund. In many cases the refund is deposited into a bank account. When a creditor has obtained a judgment against an individual the creditor is allowed to try to capture funds on deposit in bank accounts. The garnishment of bank accounts can include up to 110 percent of the funds owed on the judgment. On a weekly basis individuals are calling my office in a panic because funds that they were counting on were taken from their bank account. The garnishment of funds from the bank account often results in bank fees which take the account negative. The good news is bankruptcy filed prior to the garnishment of funds will stop the creditor from taking the funds. The funds are protected on the date of filing.


The vast majority of individual or married couples filing for chapter 7 or chapter 13 bankruptcy protection keep all of their assets including: houses, cars, cash, wages, bank accounts, retirement accounts (401k & IRA…) televisions, and tax refunds. Refunds are protected when individuals elect the federal exemptions under 11 U.S.C. § 522 in a Minnesota bankruptcy filing. Cases where nothing is paid to the trustee or any of the creditors are commonly referred to as “zero asset bankruptcy”. Zero asset does not suggest that filers have no assets, instead zero asset suggests that all of the assets that the filer possesses are protected by 11 U.S.C. § 522(d).


Even if tax returns and wages have been garnished or taken by a creditor prior to filing it is possible to recover those funds by filing bankruptcy. A bankruptcy filed within 90 days of garnishment which adds up to $600.00 or more can be recovered. The funds must also be exempt under the bankruptcy code. A typical example is an individual or married couple who receives a $3,000.00 tax refund that is deposited into a bank account. A judgment creditor then issues a garnishment to the bank and the bank responds by forwarding the funds to the creditor. Once a bankruptcy is filed, and the garnished funds are listed and exempted, the creditor then has to give the funds back to the debtor. Obviously the problem is first trying to come up with the money to pay for a bankruptcy after a garnishment has taken all the funds from the bank account. Also at times recollecting the funds from the creditor can take time. The ounce of prevention is better than the pound of cure in this case; file the bankruptcy before the garnishment is the best thing to do.


Much like a chapter 7 bankruptcy a chapter 13 may also allow most filers to keep tax returns. If the tax return is due to be paid, the filing of a chapter 13 will protect those funds from being garnished. The protection is provided by 11 U.S.C. § 362. The automatic stay continues during the term of the bankruptcy, typically 3 to 5 years depending of factors.

Also much like a chapter 7 if a creditor has taken the tax return it can be recovered and returned to you so long as it was taken within 90 days and the amount more than $600. The key much like a chapter 7 is to ensure that the funds are not taken. The best thing to do is to seriously consider bankruptcy when debt repayment is not possible or if creditors have taken judgment.

Once in a chapter 13 plan you are allowed to keep tax returns so long as the combined federal and Minnesota refunds are less than $2000.00 for a married filer and $1200.00 for a non-married filer. After filing for chapter 13 protection the filer must ensure that wage withholding is correct and that not too much and not too little refund is received. Essentially we want to ensure that the trustee is not owed a portion of the refund and that the IRS is also not owed.

Bankruptcy is a powerful tool to ensure assets are protected, including tax refunds. Contact Bolinske Law today to discuss your situation for free.

  • Jane Fox
    Posted at 08:31h, 15 July Reply

    My friend is in a lot of debt and is considering filing for bankruptcy. I know that tax returns are one of her many concerns. I believe she’s looking at chapter 13, so it seems she’ll be able to retain her tax return. That’s good news! Of course, I’ll still advise her to talk to an attorney about her situation, but maybe knowing this will encourage her to take that first step.

    • Chad
      Posted at 14:23h, 29 July Reply

      Your friend may be able to retain her tax returns in a chapter 7 or chapter 13 bankruptcy. The ability to keep the returns depends upon what State the bankruptcy is filed in and the available exemptions to protect assets.

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