If you’re currently considering or in the midst of working with a lawyer to file for bankruptcy, it’s wise to take the upcoming tax season into account, especially if you’re expecting a refund and want to hold onto it. Below is a brief overview of how bankruptcy can affect your tax return in New Mexico, as well as advice for keeping your refund.

Bankruptcy Exemptions & Your Tax Return

When you file for bankruptcy, all of your non-exempt assets become estate property. This includes your tax refund, which is considered a taxable asset. However, federal and some state laws—including New Mexico’s—offer exemptions, which refer to assets that cannot be taken from you because they’re considered necessary to achieve a reasonable standard of living. A bankruptcy lawyer will be able to assess your overall financial situation and tell you whether your tax refund can qualify as an exemption. 

Best Bankruptcy Practices for Non-Exempt Refunds 

If you’re entitled to a refund that your bankruptcy lawyer determines is not exempt, you may want to consider waiting to file your bankruptcy petition until after you have filed your taxes and received and spent the refund. For this to be a viable solution, the refund must be spent on necessities and living expenses such as mortgage payments, medical bills, clothing, and food. If you file your bankruptcy petition before submitting taxes, you may be required to turn over the refund for distribution to your unsecured creditors.

There are also some strategic adjustments you can make to increase your chance of keeping your refund. For example, if you expect to receive a large refund because of the amount you have taken from your paycheck each month, you can adjust your withholdings early in the year so you take home and receive a smaller refund. Another tactic is to contribute more of your salary to an employer 401k or IRA. 

If you’re thinking of filing bankruptcy during tax season, the attorneys at Bristol Law Office can help. With more than 30 years of experience helping clients in the Roswell, NM, area get back on their feet financially, this seasoned legal team will help make sure you achieve the best possible outcome and get to keep your refund. Visit their website to learn more, and call (575) 625-5284 to set up a consultation with a lawyer today.