What Happens To My Tax Refund In Bankruptcy?

Tax Refunds In a Bankruptcy

Are you in the process of filing for bankruptcy?

It’s important to note that this is designed to be a fresh start for you and people who are suffering from unpayable levels of debt.

However, that doesn’t mean that it comes without a cost.

During a bankruptcy, you will need to hand over all your assets to your trustee.

They will then use these assets to pay off your creditors and cover a portion of the money that you owe.

You will also have a surplus income and monthly payments to keep in mind as well.

But what if you receive money from a tax refund during your bankruptcy?

What Does The Law Require?

According to the Canadian Income Tax Act, your Licensed Insolvency Trustee must file a personal income tax return for you during the year that you filed for bankruptcy.

So, if you filed in 2020, then they will need to prepare your 2020 tax return.

This means that any tax refund from 2020 would then be sent to your Trustee rather than to you.

Remember, your tax refund will be considered another asset which means that the CRA must pass it onto your Trustee.

Unfortunately, you won’t benefit from it directly.

Instead, it will be added to the trust account that is used to pay your creditors.

You might think that this is the end of the story however there are more details to consider.

For instance, your trustee will need to file both a pre-bankruptcy tax return and a post-bankruptcy tax return.

Pre-Bankruptcy Return

This will cover the period from the start of the year to the bankruptcy date.

If money is owed through this return, then it will be discharged with your bankruptcy.

If there is a refund, it will be sent to your trustee as a potential asset.

Post Bankruptcy Return

This will cover any period after you filed up until the end of that year.

The money owed here will need to be paid back because it’s not considered part of the bankruptcy.

However, any refund here will still go to your trustee to pay any of your creditors.

Be aware that a trustee is not obligated to complete this second return and the main responsibility for this is yours.

What About Prior Years?

You might be wondering what happens to income from tax refunds for years before the bankruptcy.

This would also go directly to your Trustee from the CRA.

Again, it will be counted as an asset and used to pay back creditors.

Do you have other questions about the process that you will need to complete during your bankruptcy?

We can help and will work to make sure that you understand all the key details.

Contact us today and we will begin your path to debt relief together.

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