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What Happens to My Income Tax Refund in a Chapter 13?

What Happens to My Income Tax Refund in a Chapter 13?

INCOME TAX AND BANKRUPTCY EAST TEXAS

If the Debtor in a Chapter 13 case has been required to file federal income tax returns in the years prior to the filing of bankruptcy, then a refund amount for future years is estimated based on these refunds and circumstances of the past.

All Chapter 13 bankruptcy filings are based on a budget that is proposed by the Debtor which reflects all of the Debtor’s income and expenses.  The income of the Debtor includes any estimated income tax refund, because any refund represents money that the Debtor did not actually owe to the Internal Revenue Service.

An example of a typical scenario in a Chapter 13 case might help to understand income tax refunds in a Chapter 13 case. Assume that the Debtor received a refund of approximately $3,000.00 in the year prior to the filing of bankruptcy.

Again, because that money was not owed to the Internal Revenue Service it is added to the Debtor’s income in the proposed Chapter 13 budget.

Since that income is available to fund the Debtor’s Chapter 13 Plan the estimated refund amount will be given to the Debtor.

If the refund amount from the Internal Revenue Service exceeds the estimated amount put in the budget (i.e. The amount estimated in our sample case, $3,000.00), then the Debtor is required to turn the excess refund amount over to the Chapter 13 Trustee.

So, if the Debtor receives a refund of $4,000.00, then $1,000 must be turned over to the Chapter 13 Trustee.  This $1,000.00 will go to pay unsecured creditors in the Debtor’s case.

Income tax refunds are of course monitored by the Chapter 13 Trustee through a review of the annual income tax returns of the Debtor during the pendency of the case.

Debtors are required to furnish a copy of their return to the Chapter 13 Trustee within ten (10) days of filing the same with the Internal Revenue Service.

One important thing for a Debtor to keep in mind when calculating refund amounts is that the Trustee will not allow the Debtor to deduct amounts paid for a rapid refund.

So, if the Debtor is paying $200.00 to the tax preparer for a rapid refund and is required to turn over $1,000.00 to the Trustee, the $1,000.00 cannot be reduced by the rapid refund amount.

The Trustee will however allow for the deduction of the normal fee paid for the preparation of the income tax return.

As always, any opinions expressed on this website are just that, opinions. So if you have a question regarding bankruptcy or debt relief, then please give me a call to discuss your individual situation.  Bankruptcy, as many other areas of the law, can be very case or fact specific.  I pride myself on giving you the answers to your questions that are based on your individual circumstances.

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