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How to Keep Tax Refund in Chapter 13

tax refound - How to Keep Tax Refund in Chapter 13

Also known as the wage earner’s plan, Chapter 13 enables those with regular income to develop a repayment plan. Debtors propose a plan to make installment payments over three to five years, though under the CARES Act it can be extended up to seven years. Most of the time, debtors must turn over any tax refund received for more than $2,000.00 to the Chapter 13 trustee but there’s a way they might be able to keep it. 

What happens when a debtor is anticipating a tax refund? Under Chapter 13, debtors are pledging all their disposable income into the repayment plan and usually don’t have a cushion for unexpected expenses. Tax income is considered disposable income that could be used to pay creditors so you might be wondering how to keep tax refund in Chapter 13 of the bankruptcy code. 

Why is tax refund generally considered disposable income?

Under Chapter 13 debtors must use all their disposable income to make payments to their creditors under the plan. Any income that is not used for transportation, food, shelter, or necessities under IRS standards is usually considered disposable. When tax refunds aren’t included in the calculations used to support the repayment plan trustees might consider it disposable income. However, it’s possible to keep the tax refund.

What you need to know

One of the easiest ways to excuse a tax refund is to prove that the funds are needed to make the repayment plan work. This can be achieved by filing an Affidavit to Retain a Tax Refund and proving necessary expenses that necessitate retention of the tax refund by the Debtor.  In the Affidavit, debtors will need to specify which tax refund they need to excuse, the amount and why they need to keep the funds (proof of these expenses will be required either receipts or estimates from professionals for items needed or items needing repair). 

These refund excuses are reserved for unexpected yet necessary expenses such as car repairs, funeral expenses, appliance replacements, and unexpected medical expenses. Debtors should document their expenses after receiving the permission to keep the tax refund.

To get the best legal help available and more information on how to keep Tax Refund in Chapter 13, you can count on the expert advice of Acker Warren P.C.

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