3 Things That Happen to Your Tax Refund During a Chapter 13 Bankruptcy
A common question people have when filing for Chapter 13 bankruptcy is: “What’s going to happen to my tax refund?” The answer hinges on a few variables, which determine whether the refund must be turned over to the Chapter 13 Plan, kept for personal use, or divided between the two.
Refunds Turned Over to the PlanThere are instances where tax refunds are turned over to the Chapter 13 Plan. The one a debtor is almost guaranteed to encounter has to do with the refund being a pre-petition asset. When you file your Chapter 13 bankruptcy, your attorney files the Petition for Relief. The filing of the petition creates a symbolic division between the assets, liabilities and earnings that accrued before filing from those that accrue afterwards.
When you file for bankruptcy, a portion of your earnings and the corresponding taxes paid on those earnings are pre-petition assets. For example, if you file for bankruptcy on July 1st, roughly one half of your earnings are pre-petition. That also means about one half of the tax return is also a pre-petition asset. As a pre-petition asset, the tax return would either need to be claimed exempt through an applicable exemption or accounted for in the Chapter 13 Plan.
There are also instances when the Trustee of your case will require that your yearly tax returns are turned over to the Chapter 13 Plan. This could be because the Plan explicitly stipulates turnover, or because there are issues with the Plan itself, such as length or default issues, that could be resolved by turning over the tax refund.
You May Keep Your RefundIf the Plan doesn't specifically require you turn over your refund, and there are no other issues (such as length or default), you may get to keep your tax refunds during your bankruptcy. Chapter 13 bankruptcies usually last between 36 and 60 months, so you will routinely face the issue of deciding how to apply your refund in bankruptcy during the pendency of the case during that time period.
If you do decide to try and keep your refund, it is likely you and your attorney will have to make a motion to the Court seeking permission to retain it. If a motion is required, you'll have to demonstrate reasonable and necessary expenses that you're seeking to use the refund for.
Splitting the RefundThe third option regarding a tax refund is to keep part of the refund for expenses you have, and use the remainder to apply towards the bankruptcy to resolve any issues in the case, or progress the bankruptcy along.
As is always the case with income or assets aquired during a Chapter 13 bankruptcy, it*s important that you consult with your attorney before you spend your return to see what options are available and which one is best for you and your case.