By John G. Merna, Esq. | Last Reviewed: June 2026 | The Merna Law Group, P.C.
Quick Answer
Your tax refund may be considered an asset in bankruptcy. In Chapter 7, a refund you are owed at the time of filing may be partially or fully claimed by the bankruptcy trustee. However, Virginia law protects certain portions of your refund. Therefore, timing your filing and understanding exemptions are both critical to protecting your refund.
Why Tax Refunds Are an Asset in Bankruptcy
A tax refund is considered an asset. It represents money the government owes you — an overpayment of taxes you are entitled to receive back. Understanding this relationship is essential before you file.
When you file bankruptcy, all assets you own or are entitled to receive become part of the bankruptcy estate. This includes refunds you have already earned but not yet received. In addition, it can include a portion of the refund you will earn at year-end, prorated based on how many months have passed.
What Virginia Law Protects
Virginia law specifically protects two portions of your tax refund. Under Va. Code § 34-26(9), the portions attributable to the Child Tax Credit and the Earned Income Credit are fully exempt. Therefore, the trustee cannot touch those amounts. However, any remaining refund balance may still be at risk.
Chapter 7 vs. Chapter 13 — How Each Treats Refunds
In Chapter 7, timing is everything. If you file right after receiving and spending your refund, there is nothing for the trustee to claim. In contrast, if you file while a large refund is pending, the trustee may claim it. As a result, many clients time their Chapter 7 filing strategically around their refund.
In Chapter 13, refunds are treated differently. You may be required to turn over part of your annual refund to the trustee as part of your repayment plan. This depends on your plan terms and your disposable income calculation. However, with careful planning, your attorney can structure the plan to minimize this impact.
Six Things NOT To Do With Your Refund Before Filing
How you spend your refund before filing also matters. Certain uses of your refund can create problems in bankruptcy. For example, paying back friends or family members right before filing is considered a preferential transfer. The trustee can reverse those payments. In addition, using a large refund to pay off a single creditor while ignoring others can be treated the same way.
Generally safe uses of your refund before filing include paying regular living expenses, catching up on rent or mortgage payments, paying utility bills, and paying your attorney’s fees for the bankruptcy case itself.
Get the Timing Right — Talk to Merna Law First
Tax refund timing is one of the most common planning issues in Virginia bankruptcy cases. Getting it wrong can cost you hundreds or thousands of dollars. Getting it right costs nothing extra — it just requires a conversation before you file.
Call Merna Law at 757-490-3800 for a free consultation. We will review your refund situation, your filing timeline, and build a strategy that protects as much of your refund as possible under Virginia law.
