Many individuals in western Louisiana rely on their tax refunds to cover essential expenses. Whether you receive a small refund every year or a large one due to Earned Income Credits or Child Tax Credits, the question naturally arises when considering bankruptcy: will you be allowed to keep your refund?
In many cases, the answer is yes. Bankruptcy courts often recognize that tax refunds provide families with critical funds to pay for rent, utilities, childcare, transportation, and other necessities. However, the specific outcome depends on whether you file Chapter 7 or Chapter 13, what portion of your refund comes from refundable credits, and whether you can document why the funds are needed.
How Louisiana Bankruptcy Courts Treat Refundable Credits
A large number of bankruptcy filers in Shreveport, Lafayette, and Alexandria receive refundable credits such as:
- Earned Income Credit (EIC)
- Additional Child Tax Credit (ACTC)
Most bankruptcy courts allow debtors to keep these credits because they are designed to support lower-income households and are considered essential for maintaining basic living expenses. These credits are generally not treated as assets that can be seized by the bankruptcy trustee.
Over-Withholding and Large Refunds
Some people receive large refunds each year because their employers withhold more federal tax than necessary. While this can feel like a forced savings plan, it also creates complications in bankruptcy.
If a trustee requires turnover of part or all of the refund, over-withholding can unintentionally reduce your take-home pay while increasing the amount of money the trustee may claim.
Courts sometimes allow debtors to prorate their refund by separating refundable credits from any portion created by over-withholding. If you can demonstrate that the prorated portion is needed for reasonable household expenses, you may be allowed to keep that amount.
An experienced bankruptcy attorney can help prepare the necessary documentation to show why the funds are essential for you or your family.
Chapter 7 and Chapter 13: What Happens to Your Tax Refund?
How tax refunds are treated depends on the type of bankruptcy you file. The rules and strategies vary, and knowing the differences is important before making any decisions.
Chapter 7 Bankruptcy and Tax Refunds
In Chapter 7, the trustee may claim part or all of your tax refund if the refund is considered an asset of your bankruptcy estate. This typically applies when:
- You earned the refund before filing
- Your refund includes a non-exempt portion from over-withholding
- You filed early in the year before receiving the refund
When You May Keep Your Refund
You may be able to keep your refund if:
- The refund is entirely composed of Earned Income Credit or Additional Child Tax Credit
- Louisiana exemptions cover the portion of the refund that is not credit-based
- Your attorney demonstrates that the prorated refund is necessary for essential living expenses
- You adjust your withholdings before filing to minimize future refunds
Many Chapter 7 filers in western Louisiana successfully keep most or all of their refund, but it requires planning ahead and understanding the timing of your filing.
Chapter 13 Bankruptcy and Tax Refunds
In Chapter 13, your repayment plan lasts three to five years, and tax refunds often become part of the calculation. Trustees may require that refunds be turned over each year to help fund the plan.
When You May Keep Your Refund
You may be allowed to keep your refund in Chapter 13 if:
- Your plan is structured to include prorated refunds as part of your monthly income
- The funds are needed for necessary expenses or emergencies
- Your attorney negotiates for refund retention as part of plan confirmation
- The refund comes from Earned Income Credit or Additional Child Tax Credit
Some courts allow debtors to keep their refunds if they can show the money is needed for items such as vehicle repairs, medical expenses, school costs, or basic living needs.
How to Increase Your Take-Home Pay and Reduce Refund Turnover
One of the most effective ways to protect tax refunds is to prevent over-withholding in the first place. This means adjusting the amount of tax taken out of each paycheck so your refund is smaller and your take-home pay is larger.
General Strategy for Filling Out a W-4 Form
Because of changes to federal tax laws in 2019 and updates to the W-4 form in 2020, many employees unintentionally over-withhold. Filing a new W-4 may increase your monthly income and reduce the portion of your refund that could be subject to turnover in bankruptcy.
If You Owed Taxes Last Year
Increase your withholding to avoid owing money or penalties next year.
If You Received a Refund Last Year
Reduce your withholding so you can take home more money throughout the year rather than receiving a large refund later.
IRS Tax Withholding Estimator
The IRS provides a Tax Withholding Estimator that helps determine whether your current withholding is appropriate. Adjusting your W-4 based on this tool may improve your financial position before or during bankruptcy.
If you’re unsure how to complete the form or how your withholding interacts with bankruptcy, consult your attorney or tax professional.
How the Process Works if You Want to Keep Your Tax Refund
Keeping your refund is often possible, but achieving that outcome requires a few specific steps.
Determine your filing timeline.
Filing before or after receiving your refund can change whether it becomes part of your bankruptcy estate.
Break down your expected refund.
Identify what portion is from Earned Income Credit, Child Tax Credit, and over-withholding.
Document your monthly expenses.
Courts often allow refund retention if the money is necessary for rent, utilities, childcare, or other essential expenses.
Adjust your W-4 early if over-withholding.
This protects future income and reduces refund size.
Work with your attorney to present your justification to the trustee.
A clear, well-prepared explanation often makes the difference.
Follow the specific procedures for your chapter.
Chapter 7 and Chapter 13 require different steps for requesting refund retention.
An attorney at Simon Fitzgerald, LLC can help ensure your request is supported with the right financial information and court documentation.
Frequently Asked Questions About Tax Refunds in Bankruptcy
Do bankruptcy trustees take state tax refunds or only federal refunds?
Both may be included in the bankruptcy estate, depending on timing and exemption coverage.
What if I have already spent my tax refund before filing?
The court will review how the refund was used. Necessary expenses typically do not cause problems, but luxury spending can raise issues.
Can I delay filing until after I receive and use my refund?
Yes, timing your filing is a common strategy. An attorney can help determine if this is the best choice.
Are earned income credits always protected?
They are often protected, but treatment can vary by jurisdiction. Your attorney can clarify how courts in Louisiana typically handle these credits.
What if my refund is needed for vehicle repairs or medical bills?
Courts frequently allow debtors to keep refunds for essential, documented expenses.
How does filing jointly with a spouse affect refund turnover?
If both spouses file for bankruptcy, the refund is jointly evaluated. If only one spouse files, the refund may need to be apportioned.
Will adjusting my withholding during the bankruptcy help?
Yes. Adjusting your withholding prevents large refunds and increases take-home pay, making repayment plans more manageable.
Do I need trustee approval before spending a refund?
Yes. In Chapter 13 especially, spending a refund without approval can cause issues. Always consult your attorney first.
Contact a Bankruptcy Lawyer Today
Protecting your tax refund during a bankruptcy is crucial, and getting the help from a skilled Louisiana bankruptcy attorney could make all the difference in your situation. Simon Fitzgerald, LLC’s experienced attorneys can help you take the necessary steps to protect your refund and to make the most out of your bankruptcy.
Call (318) 284-5565 to schedule your consultation today.
