Chapter 7 Bankruptcy: Your Tax Refund in New York

If you file a Chapter 7 bankruptcy in New York, you might be wondering how it will affect your tax refund. There are several factors that determine whether you can keep your refund, or whether you will lose it under the Chapter 7 filing:

1) If you're a homeowner, and have taken the homestead exemption (in New York, this exemption is currently $50,000 per filer), you cannot claim a tax exemption. If you are owed a refund at the time of the Chapter 7 filing, it will be paid to the Chapter 7 trustee.

2) If you filed Chapter 7 after January 1, but before your tax refund is disbursed, the refund will be paid to the Chapter 7 trustee.

3) If you filed your taxes jointly with your spouse, but you are the only one named on the Chapter 7 filing, you will usually lose only half of the tax refund.

4) Tax refunds are pro-rated for Chapter 7 filings made before January 1. If you file bankruptcy on July 1, you will get half the refund, and the trustee will get the other half; if you file on October 1, you wil only get to keep one-quarter of the refund.

5) If you file Chapter 7 after you receive your tax refund, and you spend the refund, you usually won't have to pay it back unless you used it to make a preferential payment to a debtor (e.g., a credit card company, a relative who lent you money). If the refund was used to pay for ordinary expenses, you won't have to worry about the trustee coming after it.

6) If you didn't take the homestead exemption, or you are not a homeowner, you can claim an exemption of $2,500 per filer in New York. Any refund over this threshold will be paid to the Chapter 7 trustee.

Finally, keep in mind that future tax years will not be affected by your Chapter 7 filing - only the tax year in which the bankruptcy petition was made.