Usually, we’re touting pre bankruptcy planning: know what’s exempt, what debts will survive bankruptcy, and arrange your affairs to lose as little as possible to a bankruptcy trustee.
There’s one bit of tax and bankruptcy planning that you can do after you file bankruptcy. That’s despite the fact that bankruptcy is generally a snapshot of what you own and what you owe on the day you file the case.
Bankruptcy trustees will claim a percentage of the current tax year’s refund, payable to the trustee when the debtor receives it, long after the bankruptcy case is filed.
Usually the trustee demands the fraction of the refund that represents the portion of the year prior to filing. If you file in month 10, the trustee wants 9/12’s of the refund.
OK. But, there doesn’t have to be a refund by the time you get to the end of the year!
Remember the bit of wisdom from Judge Learned Hand :
Each man is free to arrange his affairs so as to pay the least tax.
Post bankruptcy planning
So, you’ve got to file bankruptcy now, and you usually get a healthy tax refund. How do you keep a portion of that refund from going to your creditors?
Assume that you filed in October. Usually get a plump tax refund because you use tax withholding as a savings device. Do nothing and the trustee gets 3/4’s of the refund for your creditors.
Anything you earn after the case is filed is yours to keep, free of the claims of creditors and trustees.
Reduce your tax withholding after you file, or even when you make the decision to file bankruptcy. Make sure that there won’t be a refund by not overpaying.
Keep more of what you earn after filing bankruptcy.
Granted, what you keep won’t come to you in a check from Uncle Sam at tax time. It will come in a larger take home check.
But dollars are dollars and if it’s yours to spend, or better yet, save right now, so much the better.
Plan for your future
Then at year’s end, consider changing your withholding for the upcoming year. Instead of a refund each year, try to match your withholding more closely to your expected tax obligation.
The money you had been stashing with Uncle Sam? You’ve proved you don’t need it to live day to day. Put it in a retirement account, so you live better later.