In a Chapter 13 bankruptcy case, tax refunds received after you file your case have to be paid to the Chapter 13 bankruptcy trustee.
The 6th Circuit court of appeals, just under the U. S. Supreme Court, covering Michigan, Ohio, Indiana and Kentucky, says so.
Their decision, that income tax refunds are disposable income that must be paid to the trustee in a Chapter 13 bankruptcy, controls what we can do in Chapter 13 cases filed in Michigan.
It is possible to get bankruptcy court approval to allow you to spend the tax refund on something, but you have to file a motion and get that approval in a court order.
For Chapter 7 bankruptcy, well, that depends.
Your tax refund is calculated to accrue 1/12th every month.
So, if you file Chapter 7 bankruptcy on July 1, six months into the year, figure half your tax refund for that year has accrued.
So, it must be listed as an asset and claimed exempt if you want to keep it.
Otherwise, the Chapter 7 trustee can take it.
Although the Bankruptcy Code says the debtor, that is the person who files bankruptcy, has a right to amend the bankruptcy schedules at any time, many courts have held that if you leave off an asset, such as a tax refund, you cannot amend later to keep it from the trustee.
So, if you file on say, April 1, and have not received your tax refund for the previous year, that un received refund is an asset that must be listed, and claimed exempt, or you will lose it to the trustee.
And, you would have accrued one fourth, 3 months out of 12, of any tax refunds you might get for the current year.
So, list both, and exempt both.
In Michigan, we can use the federal exemptions, so the “floating” exemption of 11 USC 522(s)(5) can be used to cover tax refunds.
What Happens To My Tax Refunds If I File Bankruptcy?