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Chapter 13 bankruptcy may be appropriate for people who earn a significant income, or who intend to protect valuable property. By filing for Chapter 13 bankruptcy, debtors pledge their disposable income, and typically do not have an extra cushion for any unexpected costs. If you are expecting a tax refund and have questions about whether you can keep it during Chapter 13 bankruptcy, our DuPage County debt relief attorneys can help. At the Bankruptcy Center of Illinois, we help clients seeking to discharge their debts, and we also guide them through the process of understanding how to best protect their assets. As knowledgeable bankruptcy lawyers, we understand the unique nature of every case, and we cater our approach to each client.
According to the bankruptcy code, disposable income received during a Chapter 13 bankruptcy must be paid toward a repayment plan. Tax refunds are valuable, and typically received when you paid more than you needed to pay in your tax filing. Unfortunately, you may be concerned that this refund will be turned over to creditors.
Chapter 13 bankruptcy trustees categorize tax refunds received during a case as disposable income. This is because it was not part of the calculation of necessary expenses. However, in some situations you may be able to show the court that the refund was included when you calculated your repayment plan.
As a bankruptcy debtor, you will draft a version of a repayment plan under Chapter 13 bankruptcy. An option to try and hold onto your tax refund is to draft a version of a repayment plan that excludes tax refunds. The downside is that creditors and the bankruptcy trustee may see this refund as surplus cash that should be used as repayment.
Courts are generally skeptical of excluding tax refunds. Debtors may be advised to state a specific reason for excusing tax refunds from an initial plan. If you earmark the refund, and state the intention to spend it on a necessary item, you may be able to hold onto the refund. Most likely, you will be required to show evidence of the expense being necessary and immediate.
Excluding a tax refund may create a situation where the debtor can receive a larger refund by receiving additional income included in the income return. Or the debtor may misstate the amount they need to cover expenses in order to receive a substantial tax refund.
It may be best to ask for a limited portion of the tax refund to be excused. This is advantageous because if a refund is larger than expected, it will not go beyond the confines of the plan. Creditors will not view an exclusion of the tax refund as shielding funds.
Another option to excuse a specific tax refund from your repayment plan is to argue that you must keep the refund due to an increase in your necessary expenses. If the plan did not take into account an increase in necessary costs, this may be a strong argument. Ordinary and ongoing expenses will not likely be enough to show the court the reason for the excuse. For instance, groceries are not as unforeseeable as a vehicle repair.
A tax refund that has not been earmarked to be paid to a specific creditor or for a special expense can provide benefits. By repaying debt more quickly, you may be able to finish your Chapter 13 bankruptcy case in less time. The refund money could also reduce the required monthly payments, easing financial stress throughout the life of the plan.
The process of confirming and completing a Chapter 13 bankruptcy plan is challenging. The dedicated lawyers at the Bankruptcy Center of Illinois are here to help with your tax refunds in Chapter 13 bankruptcy, or other debt relief issue. We are proud to assist people throughout DuPage County and nearby areas, and can be reached online or by telephone at (773) 993-0024.