In Colorado, if you file Chapter 7 Bankruptcy and you are owed a tax refund, the Bankruptcy Trustee can take all or a portion of the refund attributable to over withholding of taxes and various tax credits. The Trustee cannot take the “Additional Child Tax Credit” or the “Earned Income Credit” Because they are protected under Colorado Law
Can I spend my tax refund before I file?
Yes. However, you need to be careful how you spend the refund. You should seek legal counsel before doing so as it can affect the filing of a bankruptcy or be considered a preferential payment.
Can I repay loans or debts to my family from my tax refund and then file bankruptcy?
Be Careful. If you pay family members or those considers insiders, it is considered a preferential payment. The Trustee can go back one year in time from the repayment date to claw back the money that you paid to the family members or friends. So, you might have to wait a year from the loan repayment to file bankruptcy to avoid this problem.
Can I have my tax refund deposited into my regular bank account?
You should segregate you tax refund into a separate account and not co-mingle the tax refund with any other money.
Will waiting to file my taxes until after I file bankruptcy protect my tax refund?
No. The unprotected portion of your tax refund, such as over withheld taxes, would be considered an asset of the bankruptcy estate and subject to turnover to the Trustee. The Trustee cannot take the “additional Child Tax Credit” or the “Earned Income Credit”.