If you file a Chapter 13 bankruptcy case, you will be under the scrutiny of a court-appointed trustee during the life of the plan — either 3 years or 5 years. If you have filed a plan that is paying less than 100% of your debt back to your creditors, the trustee has the discretion to keep any tax refunds you receive during those 3 to 5 years and use that money to pay your debts. This is because the Bankruptcy Code requires that all disposable income be paid into the plan and trustees certainly see tax refunds as disposable income.
If the trustee takes your tax refund, unfortunately, it does not reduce your monthly payment under the plan because the refund is just considered additional disposable income. Now, since deciding what to do with a tax refund is discretionary, the trustee may allow you to keep it if you can demonstrate some special circumstances (like an unforeseen event that affects your ability to cover your living expenses). But be prepared to demonstrate those special circumstances to the trustee. The other option is to adjust the withholdings from your paycheck so that you decrease your tax refund. The bottom line is to have as minimal amount of refund as possible. But be careful making adjustments. You do not want to end up owing large amounts of tax liabilities either.
Recent Comments