Spending Down Income Tax Refund Prior to Filing Bankruptcy

It is tax time!  For many of my Indianapolis area bankruptcy clients, this means an income tax refund.  This refund can range from a few hundred dollars to several thousand and my clients all want to know (rightly so) what do they do with this money if they intend to file bankruptcy?  

Understandably, most of my clients at Halcomb Singler would prefer to save their income tax refund.  They see this money as a sense of security and the chance to start saving so that they are never faced with financial difficulties again.  However, saving cash prior to bankruptcy is really not an option.  As I explained in a previous blog, there is only so much cash that one may have on hand on the date of the filing of a bankruptcy that is protected from creditors and the bankruptcy trustee.  For an individual bankruptcy filer, that number is $350.00 and for joint debtors it is $700.00.

The practical reality of this low cash exemption is that people have to spend down an income tax refund prior to bankruptcy.  But how should this money be spent?  In my opinion, it is still possible to spend this income tax refund wisely and in a way that will help you start out on the right foot after your bankruptcy.

DO NOT SPEND YOUR INCOME TAX REFUND ON:
1.  Gifts for Family Members or Friends;
2.  To pay credit card debt;
3.  To buy a new big screen television, go on a vacation or any other luxury;
4.  To pay back a relative for money you borrowed;
5.  To pay any amount over $599.00 to a creditor;
6.  Gambling.


INSTEAD, CONSIDER SPENDING THE INCOME TAX REFUND ON:
1.  Your living expenses including utility bills, car payment, house payment, food, gas, auto insurance, etc.
2.  Purchase something for your home that you have been putting off because you haven't had any money, but that you really need.  Examples could be a new mattress, replace carpeting, or make some badly needed home repairs (so long as you are planning to keep your house);
3.  Pay some non-dischargeable income taxes, sales tax or withholding taxes;
4.  Catch up some back child support payments;
5.  Pay to have some dental work done that you have been putting off;
6.  Buy yourself or your children some new clothing if that is something that you have not done in a long time;
7.  Pay for your medications;
8.  Buy a used vehicle if you don't have a car or need a second car (this is only a good idea if you still have remaining tangible exemptions)

Typically, I tell my clients to make a list of how they would like to spend their income tax refund and then to give me a call to review whether I believe their wishes would be acceptable prior to bankruptcy.  Of course, any significant financial decision made just prior to the filing of a bankruptcy should be discussed with a qualified bankruptcy attorney.  If you live in Indianapolis and would like to meet with me for a free initial consultation at my Carmel, Indiana office located at 718 E. Adams Street, Suite E, Carmel, IN 46032 to discuss bankruptcy call me at 317-575-8222 x 12 or click here, fill out the form and my office will contact you to schedule an appointment.

Halcomb Singler, LLP, is a debt relief agency.  It helps people file for bankruptcy under the bankruptcy code.  No attorney-client relationship with the firm of Halcomb Singler, LLP, is created through this blog. Also, please note that Erika Singler is an attorney licensed in Indiana and does not seek to practice law in any jurisdiction in which they are not properly authorized to do so.  The information contained in this blog is general in nature and should not be relied upon for the circumstances of any individual(s) or businesses.