If you’re thinking about bankruptcy, one of the most important considerations can be timing. Colorado bankruptcy exemptions only protect the Earned Income Credit and Additional Child Tax Credit portion of your federal tax refund. State tax refunds are completely unprotected. What that means is that the unprotected portion of your tax refund is part of your bankruptcy estate in Colorado, and the trustee can force you to turnover any refund to which you’re entitled. From about August through May, trustees are especially on the lookout for any potential tax refund they can get. They can force you to turnover your refund even if you haven’t filed your return yet and can even ask the IRS to send the refund directly to them.
Our objective when you file is to make sure you retain as much of your refund as possible. Consider reviewing your income withholding to see if you can minimize your income tax refund.
The best strategy to make sure that you keep your tax refund is to file your tax return and spend your refund before you file bankruptcy. In case the trustee asks how you spent the money, make sure you keep records of how you spent the refund and use it for things like:
- Rent or mortgage payments (though probably pay no more than one month in advance)
- Medical or dental care
- Food
- Utilities
- Clothing
- Car or home maintenance
- Insurance premiums
Stay away from luxury items (like a big screen TV) and paying back loans to friends or family members or paying off credit card bills with your refund. The trustee could force any family member or creditor to give that money back. Plus, that luxury item might not be protected with Colorado exemptions either.
If you’re thinking about bankruptcy, you should talk to an experienced bankruptcy attorney about the best way to handle your tax refund. You can schedule an appointment using our online scheduling system or by calling 303.331.3403 to set up a time that’s convenient for you.