The quick answer, is that you can almost always protect your tax refund. There are several different scenarios at play, so first it is best to understand your rights outside of bankruptcy, and then I will address what happens to your tax refund when you file bankruptcy:
Outside of bankruptcy, the only creditors which can touch your federal tax refund are back child support, or other governmental obligations, including student loans. For Minnesota refund, the same thing is true, and settles also have the right to intercept your state tax refund. Private creditors cannot otherwise seize your tax refund directly from the government, but once they have been deposited into your bank account, then a judgment creditor could levy on your bank account, and/or if it is deposited into a bank account where you all money to the bank, that they could do what is called a set off and refused to permit you to withdraw the money. (Lesson number one, don’t deposit your tax refund into a bank where you owe money if you are not paying them, that is like putting your hand in alligator’s jaws. Lesson two, if there are judgments against you, you should keep your money out of the bank as well).
Once you file bankruptcy, any tax refunds that are due and owing to you are part of what is called your bankruptcy estate, and part of our job is to ensure that you can protect most if not all of your tax refund. If for instance your bankruptcy is filed under March 31, 2012, and you have not yet filed your 2011 taxes, then your 2011 tax refund, as well as 25% of your 2012 taxes (since we would be three months into the year) are property of your bankruptcy estate. As long as we are able to protect your assets under the federal exemption, which is $12,000 per person, this is usually not an issue. If you have already received the tax refund and it is cash on hand and your miscellaneous assets are otherwise within the $12,000, that’s not an issue either. If we need to protect your assets under state law, for instance due to substantial equity in a home, then we can only protect that portion of the tax refund that is attributable to earned income or working family credits.
In a chapter 13, you need to commit your disposable income to your plan, and tax refunds received during the plan are considered disposable income. So that may need to be paid in, although there is normally a $1200 (for single people) or $2000 (for married debtors) “no questions asked” floor. Certainly, tax refunds while you are in a chapter 13 can and should be controlled.