The court allows a Debtor in a Chapter 13 Bankruptcy to keep $2,000.00 of any tax refund with no questions asked. The Court and Trustee’s often allow a Debtor to retain even more than the Court provided $2,000.00 due to credits such as the Earned Income Credit and certain other tax credits and exemptions. Finally, if a Debtor has unexpected expenses, home repairs, vehicle repairs, medical bills, etc. that are outside of the constraints of what a normal budget can provide for the Court will often allow additional funds to be kept often times the full amount of the refund.
The Process for Tax Returns and Refunds in a Chapter 13 Bankruptcy:
1). Prepare and file your tax return with the IRS through the normal manner with which you file a return.
2). Receipt of your tax refund. Upon receipt you may spend up to the $2,000.00 allowed by the Court until you hear further from your case trustee/ attorney.
3). Your Attorney will provide a copy of your tax return to your case trustee. Upon receipt your case trustee will review your tax return and send a letter to you and your attorney stating what if anything they believe is owed to the Trustee from your tax refund.
4). The trustee will file a Modification of your Chapter 13 Plan to provide for the additional funds over $2,000.00 that are received in your tax refund. At this point you have several options:
a). Send the amount the Trustee is requesting from your Tax Refund directly to your case trustee. If you have no unexpected expenses to plead to retain more of your tax refund and you have kept a hold of the funds in excess of $2,000.00 this is the route you will take.
b). You have unexpected expenses, i.e. house repairs, car repairs, medical expenses, etc. that you believe warrant retention of funds in excess of the $2,000.00. In order to plead this to the Court your attorney will require information from you. They will require funds to complete the work on your behalf (usually $400.00). They will require receipts and or estimates for repairs that total the amount of the tax refund you are seeking to keep. Remember if you are seeking to keep your entire tax refund you will need to provide receipts/ estimates that total the entirety of your tax refund, not just the amount in excess of $2,000.00.
c). You have no unexpected expenses and have already spent the tax refund funds in excess of $2,000.00. If this is the case you should approach your attorney about filing a Chapter 13 Plan Modification of your own to spread that amount out over the remainder of your Chapter 13 Plan presuming you do not have the funds available to pay the Trustee one lump sum in the amount that is owed. There are usually additional attorney fees of $400.00 charged by attorneys for a Chapter 13 Plan Modification.