Tax Refunds

• When you file your tax returns for the previous year, you may find that what you did pay over the course of the previous year and what you should have paid are different. If you paid less than you were required and your deductions were not enough to make up the difference, you will owe taxes. If you paid more than your liability or if your deductions are more than your liability, you will receive a refund from the taxing authority.
  
  

Chapter 7 Bankruptcy

• A Chapter 7 bankruptcy is a liquidation. The court appoints a trustee to liquidate any non-exempt property and use the funds to repay creditors. Any remaining balances are discharged as long as the debt is dischargeable. Most Chapter 7 cases are called "no asset" cases, however, because most people are able to exempt all of their property from the estate.
  
  

Estate Property

• All of your property becomes bankruptcy estate property when you file your Chapter 7. Estate property includes tax refunds, even if you have not yet received the money, as long as you were entitled to receive the money when you filed your case. For example, if you file your tax returns on April 15 and discover that you are entitled to a refund of $1,000, then file bankruptcy on April 17 before you receive the money, the refund is estate property. If you receive your tax refund before you file bankruptcy, any amount you have not spent is estate property.
  
  

Exemptions

• Exemptions allow you to take property out of the estate so you can keep it. You can choose to use the exemptions listed in the Bankruptcy Code, or you can use the exemptions listed in your state's laws, if any. Section 522(d) of the Bankruptcy Code lists the different types of property you can keep up to certain value amounts if you choose the federal exemption scheme. While 522(d) does not list an exemption specifically for cash, there is a wild card exemption, which allows you to keep up to a certain amount of any type of property, depending on how much equity in your residence you have exempted.
  
  

State Exemptions

• Most states have their own exemption laws, and the Bankruptcy Code allows you to choose your state's exemption laws instead of the federal exemptions. The Bankruptcy Code also permits states to enact laws opting out of the federal exemption scheme. If you live in a state that has opted out, the federal exemptions listed in Section 522(d) are not available to you, and you must use your state's exemptions. If you are required to use state exemptions and your state has no exemption for cash, you will likely have to turn your tax refund over to the Chapter 7 trustee.