Tax Season and Bankruptcy: Should You File Now or Wait for Your Refund?

As we settle into January 2026 here in Pennsylvania, many consumers are looking at two things: their mounting debt because the cost of living has increased and their upcoming tax refund. It’s a dilemma. You know you need a fresh start, but you also know that a $3,000 or $5,000 refund could provide a much-needed cushion. You might be asking yourself the following:

“Should I file for bankruptcy now, or should I wait until after I get my tax return?” 

The answer depends entirely on your specific assets and how much you expect to receive.

1. The "Bankruptcy Estate" Rule

When you file for bankruptcy, a legal "estate" is created. This estate consists of almost everything you own on the day you file. Under bankruptcy law, a tax refund is considered "earned" during the year you worked, not the year you received it.

• If you file today (January 18): You haven't received your 2025 refund yet, but you have already "earned" 100% of it. Therefore, the entire refund is an asset of your bankruptcy estate.

  
  

• The Risk: If we cannot "exempt" (protect) that refund, the Bankruptcy Trustee can take it and distribute it to your creditors.

2. Using the Federal "Wildcard" Exemption in PA

Pennsylvania is a "choice" state, meaning you can choose between state exemptions or federal exemptions. Most PA residents choose the Federal Exemptions because they are far more generous, especially for those who don’t own a home or have little equity in one.

As of the April 2025 adjustments, the Federal Wildcard Exemption (11 U.S.C. § 522(d)(5)) allows you to protect:

• $1,675 in any property.

• Plus up to $15,800 of any unused portion of your homestead exemption.

The Takeaway: 

If you don't own a home, you could have over $17,000 in wildcard protection to "stack" onto your tax refund, your car, or your bank accounts. In this scenario, filing before you get your refund is usually safe because we can protect the money before it even hits your mailbox.

3. The "Spend-Down" Strategy

If your wildcard exemption is already being used to protect other assets (like a high-value vehicle or professional tools), you might be better off waiting until after you receive and spend your refund.

However, how you spend that money is critical. You may be asked how you spent the refund. To stay in the "good graces" of the Trustee, you should spend the refund on necessary life expenses, such as:

• Rent or mortgage payments.

• Utility bills or back taxes.

• Necessary car repairs or new tires.

• Groceries and clothing for your family.

• Medical or dental procedures you’ve been putting off.

What to Avoid: 

Preferential Payments: 

Do not use your refund to pay back a loan to a family member or friend. The Trustee can actually sue your relative to get that money back.

Luxury Purchases: 

Buying a high-end gaming PC or a vacation right before filing can lead to allegations of "bad faith."

Chapter 7 vs. Chapter 13 Considerations

The timing matters differently depending on the chapter:

Type of Bankruptcy Filed	Tax Refund Treatment
Chapter 7	A one-time event. If protected by exemptions, you keep it and use it to get a fresh start. If not, the Trustee takes it once.
Chapter 13	Often considered "disposable income." Many Trustees in the Eastern and Western Districts of PA require you to turn over your refunds every year for the duration of your 3–5 year plan, unless we can prove the money is needed for emergencies.

There is no "one size fits all" answer. If you are facing a sheriff's sale or a wage garnishment, waiting for a tax refund might not be an option - we need to file immediately to stop those from proceeding and preserve your assets. But if your situation is stable, we can strategically time your filing to ensure you get the maximum benefit of both your refund and your bankruptcy discharge.  The experienced bankruptcy attorneys at Fiffik Law Group and help you know whether filing bankruptcy is a good solution to your debts.  During our analysis of your situation, we can give you advice on filing your taxes and whether your refund can be protected so that you can use the money for a fresh start in life.