If you are anticipating a tax refund in a Chapter 13 bankruptcy, is there a way to keep this refund for unexpected expenses? In a Chapter 13 bankruptcy you are pledging all of your disposable income into the plan and generally do not have a cushion for unexpected expenses. Tax refunds are generally considered disposable income that must be pledged into your Chapter 13 plan. How then do you keep any tax refund that you may need for unforeseen expenses. Below we detail how your Chapter 13 plan deals with your refund and what you can do to keep your refund.
DO YOU HAVE TO SURRENDER A PENDING TAX REFUND TO THE CHAPTER 13 TRUSTEE WHEN IT ARRIVES?
If you have not filed for bankruptcy and you are expecting a tax refund then you may be able to exempt any anticipated refund. You must look at your state bankruptcy exemptions to determine if you would be able to exempt your anticipated tax refund. If your state exemptions allow you to exempt your tax refund then you should be able to keep the refund. Keep in mind that this only applies for any anticipated tax refund at the time of filing and not for future year tax refunds while your Chapter 13 case is pending. The basis for not surrendering the initially anticipated refund it that it is not disposable income, but an asset that you can protect using your exemptions.
What if you cannot exempt your anticipated tax refund at the time of filing? Instead of being required to be surrendered to the trustee, the amount of non-exempt assets usually affects how much you must pay creditors during the course of your Chapter 13 case. So, for example, if you had an extra vehicle that you needed to keep but was not covered by an exemption, you would usually be able to keep the vehicle but may have to pay your creditors more in order to do so. Again this only applies for your initially anticipated tax refund at the time of filing.
IS THERE A WAY TO KEEP THE REFUND, IF YOU'VE BEEN COUNTING ON RECEIVING IT FOR MONTHS?
So far in this blog post I've been assuming that your Chapter 13 case has to be filed in a hurry, at the time when an income tax refund has accrued but not yet been received and spent by you. But the easiest way to keep a tax refund is to wait to file the Chapter 13 case until after the refund has been received and spent, in circumstances when you are able to wait. (But make sure you get a bankruptcy attorney's advice about how you spend that refund because some ways of doing so can cause other problems.)
WHAT IF YOU CAN'T WAIT UNTIL AFTER YOU GET THE REFUND TO FILE CHAPTER 13, BUT REALLY NEED THE TAX REFUND FOR A SPECIAL EXPENSE?
There a few options if you have filed for Chapter 13 bankruptcy and have a refund that you wish to keep. As discussed above if you have an anticipated tax refund you may be able to exempt this refund. This only applies to the initially anticipated refund at the time of filing but not to refunds earned during the years in which you are in a Chapter 13 plan.
Chapter 13 requires something that Chapter 7 does not,: payment of all disposable income—your anticipated income minus allowed expenses—to the trustee for distribution to your creditors. Tax refunds are generally considered income at the time they are received during the course of your case. Normally any tax refund that is received during your Chapter 13 plan must be pledged into your Chapter 13 plan.
For tax refunds earned during your Chapter 13 plan you may be able to keep these refunds by:
1.Unanticipated Expenses- If you have an unanticipated expense during your Chapter 13 case, you may be able to retain a tax refund by filing a motion to modify your Chapter 13 plan in which you request that your refund be retained. Your attorney would need to get a court order approving the modification of your Chapter 13 plan. Whether you will be allowed to keep your tax refund will depend in many cases on whether the expense is necessary, whether it was factored into your expenses at the time of filing, and whether it was a foreseen expense.
2. Earmarked Refunds- Sometimes the tax refund can be officially earmarked to be spent on an important immediate expense, such as an urgent vehicle repair, as part of the Chapter 13 procedure. At the time of filing you can request that a refund be utilized toward a certain expenses that is necessary and needed. You will likely have to provide support showing that this is a necessary and immediate expense that is needed such as necessary home repairs.
3. Change Tax Withholdings- In addition, if you receive a large tax refund you should change your tax withholdings prior to filing for Chapter 13 bankruptcy. By doing this you will receive more current monthly income that can be utilized toward ongoing monthly expenses. Your attorney can factor in this income and find additional monthly expenses that you may have. As a result the tax refund that you will receive at the end of the year will be minimal. If you have included your tax refunds into your budget, you should include a provision in your Chapter 13 plan, that allows you to keep your tax refund.
CAN THE MONEY FROM THAT PENDING TAX REFUND INSTEAD BE DESIGNATED TO GO TO A PARTICULAR CREDITOR?
Yes, as long as it is a debt which is entitled to that kind of special treatment. Likely acceptable recipients would be a vehicle or mortgage arrearage, or past due child support or maybe a co-signed debt. These are debts that must be paid in full anyway, as long as paying them quickly, ahead of other similar debts, can be justified.
ARE THERE ANY OTHER POTENTIAL BENEFITS OF PAYING THE TAX REFUND INTO THE PLAN?
Yes. Even if the tax refund money is not earmarked for a special expense or a particular creditor, the refund money paid into your Chapter 13 plan may well still provide you some very important benefits. That extra money from the refund may enable you to finish your Chapter 13 case more quickly, potentially allowing you to finish it in the (usually) minimum of three years, or in extremely unusual cases even faster (generally only applies if you are paying the full amount of your debt back). Or that extra money could well reduce the amount of your required monthly plan payments, making it easier on you throughout the life of the case. Paying the tax refund into your plan could also conceivably even turn a Chapter 13 case that would not be feasible (because of unaffordable monthly payments or too many monthly payments) into one that is feasible.
For information on keeping your tax refund in a Chapter 7 bankruptcy go to: What Happens to My Tax Refund in a Chapter 7 Bankruptcy?