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When is the Best Time to File Bankruptcy?

I hear this question a lot. Is it best to file now or should I wait? Only you can answer that question, but in terms of what the trustee might take, when it comes to tax refunds timing is everything.

A tax refund is subject to being seized by the trustee because it is property of the estate and is not exempt in Utah (some states allow a partial exemption for that portion of the refund that is attributable to the Earned Income and Child Tax credits). In general, it works like this. Suppose you filed on October 1. When the next year rolls around and you are looking at a refund for the year in which you filed bankruptcy, the trustee will be entitled to 75% of that refund because you filed after 9 months had elapsed. If you had filed on July 1, he would only be entitled to 50% of the refund because only six months of the year had passed.

So you might think the thing to do is file in January. That would be smart for the current year, but unless you’ve received and spent your refund for the prior year, the trustee will be entitled to all of that.

If you have a choice about when to file and you’re concerned about a tax refund (maybe you need it to catch up on mortgage payments or to make home or car repairs or to buy a new washer) the best thing to do is consult with an experienced bankruptcy attorney. He might advise you to file your taxes for the prior year as soon as possible (before April 15), get the refund and spend it. Once you’ve done that you can file early in the year and minimize your loss of refund for the current year. But it’s important to speak with your attorney about how you intend to use the money. If you spend it in the wrong way you could end up worse off than if you didn’t spend it at all.


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