The Consequences of Surrendering your Tax Refund in Bankruptcy

In Utah, the annual income tax refund is the most liquidated (taken) asset by bankruptcy trustees.  Why?  Because it is easy pickin's.  Often, the only way to avoid losing the tax refund money to the bankruptcy trustee is to make sure you receive it and spend it (appropriately) prior to filing the bankruptcy.  However, many I meet with are happy to be able to contribute something toward their debts, and/or don't want to delay their bankruptcy filing, so they choose to surrender either part or all of the refund money.  But, losing the money isn't the only consequence of having the trustee go after the refund.  Very often, a chapter 7 case will end up being a "no-asset" case if the trustee can't or won't go after the tax refund.  This means the case normally closes at the time the discharge is granted, meaning the case is completed in about 3 months.  However, if the trustee goes after the tax refund, the case becomes an "asset" case, and this means the trustee will spend months and months collecting the funds, distributing funds to creditors, and filing reports with the bankruptcy court.  It is not uncommon for an asset case to last at least 1 year.  Though the bankruptcy filer is not normally involved in any of the trustee's liquidation operation, the case does remain open which can cause problems in certain financial endeavors, like getting a loan.  Be sure to consider all of these implications when discussing the timing of your bankruptcy filing with a qualified attorney.Adam Brown is a bankruptcy attorney for Dexter & Dexter, a debt relief agency helping people file for bankruptcy.