Using Your Tax Refund to Hire a Bankruptcy Attorney: A Strategic Guide

The “Tax Season Spike” in bankruptcy filings isn’t a coincidence. For thousands of debtors, the arrival of a tax refund is the only time of year they have the cash to hire a bankruptcy attorney.

As I’ve noted in my previous discussions on protecting your tax refund in a  Chapter 7 bankruptcy and using the tax refund to fund the Chapter 13 plan, timing is everything. Today, the focus is on using your tax refund to your advantage by hiring a bankruptcy attorney.

By Alexander Hernandez, J.D., Professor, and Author of Consumer Bankruptcy Law (Routledge).

Key Takeaways: Using Your Tax Refund to Pay for Attorney’s Fees

• Paying a Bankruptcy Lawyer: Tax refunds provide the opportunity to make a lump-sum payment to an attorney to begin the bankruptcy process.  
• The Bankruptcy Estate: Using your tax refund to pay an attorney before filing effectively reduces your “bankruptcy estate” and helps reduce the value of non-exempt assets.
• Estate Protection: In Chapter 7 bankruptcy, the cash in the bank is often a target for Trustees. By paying your legal fees upfront, you ensure those funds work for your benefit rather than being distributed to creditors.
• Chapter 13 Feasibility: For those on a razor-thin budget, a tax refund can prove “feasibility” to the Court, showing you have the funds for a successful repayment plan.
• Full Disclosure is Mandatory: While spending a refund on an attorney is a legitimate expense, the Bankruptcy Code (11 U.S.C. § 329) requires that those fees be disclosed on the Statement of Financial Affairs.

Why Bankruptcy Filings Spike Between February and April

It’s common for bankruptcy clients to say they are “too broke to file for bankruptcy.” Between attorney’s fees, which can average $1,500 plus filing fees, and credit counseling, that could equal another $400 to $500.

Even worse, it’s been my experience that in smaller cities and counties where there are fewer choices of bankruptcy attorneys, they tend to want to be paid upfront versus allowing flexible payment plans.

That’s where your tax refund check could be your lifeline to a fresh start.

The Strategy: “Spending Down” the Bankruptcy Estate

From a strategy perspective, I may advise a client to use the tax refund as a way to limit the value of the bankruptcy estate.”

Reducing Non-Exempt Assets: If you file for bankruptcy while holding a $3,000 a tax refund, the Chapter 7 Bankruptcy Trustee might seize that cash to pay your creditors.

Converting Cash into a Service: By paying your attorney’s fees before you file, you are converting a potentially “seizable” asset into a necessary legal service. It’s a win-win situation. You have the funds to hire your lawyer, and you reduce the value of the estate, potentially protecting all of your tax refund.

Lowering the Estate Value: Because that money is spent on a legitimate, disclosed expense, it is no longer part of the estate for creditors to claim.

The “Professor’s Rule” on Disclosure

While using your refund for fees is perfectly legal and common, the Bankruptcy Code requires absolute transparency. Under 11 U.S.C. §329, every dime paid to an attorney within one year of filing must be disclosed to the court.

Professor’s Note: Do not “hide” the refund by giving it to a friend to pay the lawyer for you. The bankruptcy trustee will look into “Preferential Transfers.” The cleanest method is direct payment from your account to the bankruptcy lawyer. That will be documented clearly in the Statement of Financial Affairs.

Chapter 7 Bankruptcy vs. Chapter 13 Considerations

In Chapter 7: Attorney’s fees are almost always paid in full up front. Your refund is the “key” that unlocks the door to a discharge because it is extremely rare for a bankruptcy lawyer to file the case with a balance due. The reason is simple enough: the bankruptcy attorney is now a creditor and could wipe out their own balance by doing so.

In Chapter 13: While fees can be paid through your three-to-five-year plan, using your refund for the initial filing and “down payment” on fees can make your plan more feasible in the eyes of the Standing Trustee.

The Professor’s Conclusion: Making the Most of Your “Fresh Start”

Your tax refund is likely the largest lump sum of cash you will see this year. Using it to pay for a bankruptcy attorney isn’t just “spending money,” it’s an investment in your financial future.

Colleges and universities can purchase my bankruptcy law textbook directly from Routledge Publishing. Paralegals and students who are buying single copies can do so via Amazon Books. To access my YouTube channel, click this link.

You can learn more about filing for bankruptcy and the bankruptcy petition via this link. Information on the bankruptcy court system, contact information for trustees, and your state’s exemptions can be found here. The federal bankruptcy exemptions are listed here. The latest version of the 341 Meeting of the Creditors can be found here.

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