Does bankruptcy affect tax refunds?

 Posted on April 30, 2021 in General Bankruptcy Topics

There are many factors to take into consideration if you are thinking about filing for bankruptcy, but it is especially important to focus on the financial effects of bankruptcy. Although Chapter 7 bankruptcy offers a number of benefits for many people struggling with debt, there are other issues to review. For example, bankruptcy could interfere with your ability to receive a tax refund.

By recognizing potential hurdles, you can prepare for what lies ahead and increase your odds of a more favorable outcome.

How can Chapter 7 interfere with your tax refund?

According to the Internal Revenue Service, there are different reasons why some people do not receive their tax refunds during bankruptcy. For example, the IRS takes some refunds to pay off tax-related debt and in some instances, payment delays have nothing to do with bankruptcy. Moreover, some tax refunds are not delivered due to a turnover request by a Chapter 7 trustee.

How should you address tax refund issues during bankruptcy?

The IRS states that it is possible to receive tax refunds during bankruptcy. However, if you cannot receive your refund for one reason or another, you need to explore your options. First, try to figure out why you have not received your refund by using the IRS' "Where's My Refund" tool. Sometimes, tax refund delays have nothing to do with bankruptcy, such as backlogs at the IRS.

Although bankruptcy can interfere with one's ability to receive their tax refund, many people are able to receive refunds as they work through Chapter 7. Make sure you thoroughly evaluate your circumstances and take steps to protect your finances, during and after the bankruptcy process.