Can I Keep My Tax Refund After Filing Chapter 13?
Can I keep my tax refund in Chapter 13 bankruptcy? In a Chapter 13 bankruptcy process, your payment plan and the amount you pay your creditor will determine whether you can keep your tax refund. But if you’ve recently fallen on rough seas, you can request the bankruptcy court to modify your Chapter 13 plan payment and excuse your tax refund payment.
Free yourself from debt today and get legal advice from a bankruptcy attorney. Get the answers you need at Northwest Debt Relief Law Firm in Oregon (Portland, Salem, Medford). Find out if you can keep your tax refund after filing for Chapter 13 bankruptcy, whether you qualify under Chapter 13 and what you can expect from a Chapter 13 bankruptcy case. We offer FREE DEBT SOLUTION CONSULTATIONS, so call our law office now to schedule an appointment!
Will Filing a Chapter 13 Case Make Me Lose My Tax Refund?
Your specific bankruptcy case will determine if you must hand over your tax refund. Because your creditor is entitled to all “disposable income” under the Chapter 13 case, you must plan on filing your tax return to the Chapter 13 trustee appointed by the bankruptcy court every year to pay your creditor.
But depending on the provisions of your plan payment, your bankruptcy trustee, as well as the amount of debt you are paying off, you could be able to keep your tax refund after filing Chapter 13 if:
- keeping tax refunds part of your plan’s strategy;
- you are eligible to “excuse” a tax refund turnover;
- you are paying a minimum of 70% of your unsecured debt; or
- you are following a “100% strategy” to pay off all unsecured debt.
If you are unsure about what your Chapter 13 plan entails, your best move is to get legal advice from your Chapter 13 bankruptcy attorney in Oregon servicing Portland, Salem, and Medford.
Excusing Tax Refunds in the Initial Plan
You can try drafting an initial version of the Chapter 13 plan that suggests leaving out tax refunds. This may raise objections from your creditor and the Chapter 13 bankruptcy trustee, who may see a tax refund as extra funds. To maximize your chances of having this kind of plan approved, ask for just a portion of the refund to be excused. Even if your refund is higher than you expected, you won’t go beyond your plan’s requirements and end up with a windfall by keeping more money hidden from your creditor.
If you can provide a compelling, detailed explanation for this provision, you may have a better chance of obtaining a plan that excuses a future refund approved. A debtor might sometimes have a significant annual expense for which they usually allocate a tax refund.
A court is typically hesitant to approve this arrangement since not including a tax refund in a Chapter 13 repayment plan might create loopholes for the debtor. If they earn extra income, they may be able to include it in their return and receive a higher refund correspondingly. A debtor who expects a large tax refund may have overstated the amount needed to fulfill their necessary expenses, which could prompt a court to look cautiously at that portion of the plan.
How to Keep a Tax Refund After Filing Chapter 13 Case
If you are required to pay your income tax return, you can petition the bankruptcy court to excuse your duty by filing a Chapter 13 plan modification. Every year, you need to file a separate plan modification which includes the following:
- tax refund you want to keep;
- amount of the refund; and
- financial hardship you are experiencing.
Bankruptcy courts will usually excuse a tax refund turnover if it is required and unforeseen. Buying groceries, paying your car loan, or paying anything else listed in your initial Schedule J: Your Expenses budget is unlikely to be approved unless there is an additional hardship factor.
For example, Sarah pays the bankruptcy trustee $1,000 every month. Her monthly income from employment barely meets her needs and plan payments, so she slips further behind each month. She needs her tax refund to pay off her backlog of utility bills.
Sarah’s tax bill could be excused if she can prove that her expenses grew owing to inflation or some other event outside her control and not due to a lack of plan. The court may also approve an excuse for a tax refund if she has to pay for one of the following:
- car repairs;
- a brand-new major appliance;
- funeral costs; or
- unforeseen dental or medical expenses.
If you gain court approval to keep the return, keep receipts to document your expenses. Learn about your options if you cannot make Chapter 13 plan payments.
Becoming Eligible to Keep the Tax Refund If the Chapter 13 Plan is a “100% Plan” or Close to It
Find out how much your Chapter 13 plan pays your creditor if it does not mention whether you must hand over your tax refund. If you have already paid what you owe or are close to doing so, you may not have to give up your tax refund.
For example, if you pay 70% or more of your “unsecured debt,” you probably will not have to surrender your return, and you should not have to if you pay 100% of your unsecured debt under a “100% plan” (versus 0% under a “0 percent plan”).
What is a Chapter 13 One Hundred Percent (100%) Plan?
Some filers’ income is high enough that they should repay all of their creditors in full under the repayment plan. Other filers must repay their whole debt because they own (and hold) a significant amount of nonexempt property. In any case, the repayment plan is often referred to as a 100% plan.
What is a Chapter 13 Zero Percent (0%) Plan?
A zero percent plan in Chapter 13 bankruptcy is a three- to a five-year repayment plan that pays nothing to nonpriority unsecured debt such as credit card bills, medical bills, personal loans, or student loans. A filer may use every available income to advance on mortgage or car monthly payments or to pay off high-priority debt like overdue tax debt or spousal support arrearages.
What are the Requirements for a Chapter 13 Tax Return?
Chapter 13 debtors must provide tax returns for the four years preceding the bankruptcy and file every year throughout the plan. At the start of the case, the Chapter 13 trustee appointed by the court will check your tax filing status, so be ready to provide copies of your tax transcripts or tax returns to the trustee.
Because Chapter 13 trustee requirements differ, your bankruptcy attorney will clarify if the trustee will need copies of tax returns throughout the plan.
Will Filing Chapter 7 Bankruptcy Allow Me to Keep My Tax Refund?
If you file for Chapter 7 bankruptcy around tax time, Chapter 7 trustees will keep watch for tax refunds. Why? Because bankruptcy trustees know protecting money in bankruptcy is challenging, making tax refunds an easy source of funds for creditors. But that doesn’t mean you’ll automatically lose your tax refund.
To keep your Chapter 7 bankruptcy tax refund, you’ll need to either:
- spend the money before filing Chapter 7; or
- use bankruptcy exemptions to protect a tax refund you’ll receive after filing for Chapter 7.
Seek Legal Advice from a Chapter 13 Bankruptcy Lawyer!
Filing bankruptcy under Chapter 13 is a challenging process that most people cannot accomplish by themselves. Not only will you have to draft a Chapter 13 repayment plan that conforms with bankruptcy law, but it’s also common to encounter problems throughout the three or five-year plan’s term.
A bankruptcy lawyer in Oregon (Portland, Salem, Medford) can best explain your options, help you pick the right bankruptcy chapter, and evaluate if you can keep your tax refund in Chapter 13 bankruptcy. If you or someone you care about needs the most comprehensive debt relief solution available, call us immediately to book a FREE DEBT SOLUTION CONSULTATION with our bankruptcy lawyer at Northwest Debt Relief Law Firm.
Northwest Debt Defense Law Firm
650 NE Holladay St, Suite 1640
Portland, OR 97232, United States
NW Debt Defense Law Firm is a Debt Relief Agency. Where appropriate we file petitions for relief under the Bankruptcy Code solely for consumers in the District of Oregon. We represent both Oregon and Washington consumers in collections law suits in Oregon and Washington state courts.