What Happens to a Tax Refund in a Chapter 13 Repayment Plan?

Establishing a debt repayment plan through Chapter 13 bankruptcy might be the right solution if you’re earning a steady income and are concerned about keeping your home. This option is often used by people who have fallen behind on their bills due to a medical problem, divorce or temporary unemployment, and cannot catch up with their debt obligations. Repayment schedules last for three or five years. During this period, your financial activity is closely monitored. Unexpected income might be used to help pay off what you owe. With tax season here, someone subject to a Chapter 13 order might wonder what will happen to the refund they’re expecting. 

Whether you can keep your tax refund depends on several factors, including the specifics of your repayment plan and the nature of your debts. In Chapter 13 bankruptcy, tax refunds are typically considered disposable income. Courts often transfer this type of income to creditors. However, determining the specific treatment of your refund might require consideration of one or more of the following:

• Plan language — Your Chapter 13 plan might explicitly address how tax refunds will be treated. Some plans allow debtors to keep a portion or all of their refunds if they are earmarked for essential expenses, such as car repairs or utility costs.
• Financial hardship — If you can demonstrate that keeping your tax refund is necessary to meet unexpected or urgent financial needs, the court may allow you to retain it. For instance, funds needed for home maintenance or healthcare costs might qualify for an exemption.
• Whether it’s a 100 percent plan — Individuals whose Chapter 13 schedules result in 100 repayment of their debt are more likely to keep their tax refund. As creditors are already being paid in full, the refund is less likely to be viewed as necessary for repayment. Should your plan only result in partial repayment to creditors once the schedule is complete, the court may require that your tax refund be diverted to them.

Ultimately, the bankruptcy trustee and the court overseeing your case have significant discretion in determining how your tax refund is handled. If you anticipate receiving a tax refund while under a Chapter 13 plan, it’s important to discuss the matter with your bankruptcy attorney. Your attorney can help you understand how your refund will be treated and, if necessary, request modifications to your plan to retain some or all of the funds.

Jeff Field & Associates advises Georgians on Chapter 13 repayment plans and other forms of bankruptcy protection. To discuss your circumstances with an accomplished debt relief lawyer, please call 617-232-5950 or contact us online. We have locations in Douglasville, Gainesville, Bogart, Lawrenceville, Marietta and Scottdale.