There is bankruptcy and there is bankruptcy planning. The latter is crucial in avoiding unpleasant surprises when you are in a pinch for dough. Let’s face it, most folks who never imagined they’d file do so because times are tough, real tough. Whether it be medical bills, credit card debt, or mortgage deficiency amounts owed from a foreclosure or ill-advised short sale, you are left with the same empty pocket and creditor calls ad nauseam. The LAST thing you want to hear is that the Trustee assigned to your case is snatching the one thing that you’ve been secretly counting on, your ace in the hole: your tax refund.

Preparing taxes is the pits, no doubt; but for some of us, the silver lining is that Uncle Sam returns that portion of your withholdings held in excess, alternatively referred to as your “refund,”or even more alternatively termed “a reimbursement.” “Reimbursement” is defined as the act of giving back money. To be clear, this money was yours to begin with. What you’ve been doing with it for the past year is extending an interest-free loan to the MAN.

Another example of this “too kind of you but not to you” behavior is when you choose to escrow your taxes and insurance when making your mortgage payment. Now, don’t get me wrong, some of us are required to escrow for various reasons having to do with our borrower-worthiness; however, if you can opt out of escrow, do so! Banks typically charge a fee to opt-out which translates to either a slightly higher interest rate to you or perhaps a one-time payment. The reason banks charge you this is that your escrow opt-out means less money for them. So opt-out ASAP: you win, they lose.

In both examples, whether it be the Feds or the Banks, you become the investor of your monies for yourself rather than forking over your hard-earned funds as an interest-free loan so they can then invest it and squander the returns. The ease associated with convenience drives many aspects of our lives, but giving the government and financial institutions interest-free loans should be eliminated from your repertoire immediately. Go at it the hard(er) way, be involved, and reap the rewards for yourself.

I digress.

Proper bankruptcy planning can ensure that you – not the Trustee (your creditors) – receive your tax refund. I will try to explain this as simply as possible without gratuitous legal jargon, sparing you the headache and a worthless post. If you have ample time before you are planning to file, the best thing to do is adjust your withholdings through your employer so that you receive a minimal refund. In other words, you will receive more in every paycheck and squirrel away less with the government. As I wrote above, this is best practice so that you get your money sooner in your own hot hand and invest it now! Make your money work for you, not the Government. Compounding interest, time is money . . . you get the point. As a caveat here, we all want more money now, but the key is what you do with the more money now. Save it, invest it, do something smart that 10 years from now will make you proud then  of what you did now. Got it? Good.

A nominal refund makes it is less likely that the Trustee keeps it. It’s a win-win for you. You’ll receive more money throughout the year and the Trustee gets zip.

Now, if you are thinking of filing bankruptcy in the months of November, December, January, February, March, up until April 15, your best bet is: first, file your taxes; second, get your refund; and then, third, file bankruptcy. In the later months of the previous year, time is not on your side, so it makes little impact to adjust your withholdings at this stage of the game. (Although for the reasons already mentioned this is still the wise thing to do, for bankruptcy purposes you’re too late).

The tax year is what’s important (January-December). So, best practice is to wait to file bankruptcy until after you’ve received your refund and spent it appropriately. “Appropriately” means that if you do decide to delay your bankruptcy, it is usually best to spend your tax refund on living expenses and other necessities such as rent or food. You can also use it to pay your bankruptcy attorney. However, if you purchase other assets with your refund, then you must disclose them in your bankruptcy and you therefore risk losing them unless they are exempt. What I advise clients in determining appropriateness is that they consider whether the purchase or expense is a want or a need? 60 inch flat screen v. new car providing reliable transportation? Courts and Trustees are somewhat flexible in these determinations. For instance, I am always comfortable arguing that a vacation is both a want and a need, and is thus appropriate.

Bankruptcy trustees are particularly concerned with your assets. The name of the game in bankruptcy is whether an asset is exempt or non-exempt. You want exempt assets. Non-exempt assets are losers, and you may be required to turn them  over to the Trustee, who then distributes them accordingly to your creditors. When it comes to tax refunds, beginning January 1 of any given current year, any refund coming to you from last year’s tax return filed becomes this year’s  asset. Remember also that a received but unspent refund is treated as cash, and cash is non-exempt (i.e., a loser) and is open game to a trustee’s reach.

In sum, it is always preferable for you to keep your money rather than hand it over to the government or big banks. Along these lines, in a bankruptcy, you need to preserve what you can for you. If you are facing bankruptcy, your financial house’s foundation is probably shaky and oftentimes you are purely in survival mode. You may feel as if you are in an episode of Survivor, except that it’s real life and you’re the only contestant. Do not fret, you will beat this chapter in your life and come out better for it. Just don’t lose pieces along the way that are rightfully yours so long as planned for properly. Bottom line with refunds and bankruptcy is that the best strategy might be to delay. Hang on, deal with the incessant collector calls just a little while longer and keep reminding yourself that this is what’s best for you – be selfish!

In no way should this blog post be construed as my advocating that bankruptcy be handled in an unethical, improper or illegal manner; only that you squeeze the most juice from your fresh start orange and turn the page on more firm financial footing!