Legal Question in Bankruptcy in California

If you file Chapter 7, your income tax refund is considered part of the estate and you would need to exempt it to avoid the Trustee taking it to pay your creditors. Exemptions depend on what set of exemptions you will be using. Assuming you are filing in California, there are 2 sets, CCP 703.140 and CCP 704.110 etc. If you don't own a home you probably would use the the 703.140 set. It gives you a catch-all exemption of over $25,000.00 you can use on any property, including the right to receive a tax refund (assuming you haven't already used the bulk of it on other assets). If you own a home with equity, you probably are using the 704 set, and it has no exemption catch-all. In that case, your only option is to wait until you get the refund and put it into exempt property under the 704 set, such as household items, IRA accounts, etc.

While some judges have ruled that transforming non-exempt assets into exempt assets on eve of bankruptcy can be set aside by trustee, most won't do so unless it is really outrageous, and $7,000 isn't likely to trigger such a ruling.