When filing for Chapter 13, some filers receive a tax refund. As it is currently tax season, we get a lot of questions regarding a tax refund and bankruptcy. If you are in the midst of a Chapter 13 bankruptcy, do you need to turn over your tax refund? In most cases, bankruptcy filers could really use their refund, but it all depends on the confirmation order.
The confirmation order is the document that the judge signs to approve your Chapter 13 Plan. It states whether or not you are obligated to surrender your tax refunds to the Chapter 13 trustee. (Every individual who files for Chapter 13 has a trustee assigned to their case. The assigned trustee in responsible for the oversight of the case until its completion. This could mean until the case is dismissed or it could mean until the discharge is received. Once you have submitted your pay stubs, tax returns and additional requested/required financial information, you will have a meeting at which you will be reviewed by your assigned bankruptcy trustee.
When filing for Chapter 13 bankruptcy, filers are required to pay all their disposable income toward the Chapter 13 p
lan. “Disposable income” means any income that they do not use to pay for reasonable and necessary expenses (food, transportation, home, etc.)
When a tax refund is received in the midst of a Chapter 13 bankruptcy, the trustee will consider the additional funds “disposable” because this is an additional income when considering the income and expenses used to show you could afford the Chapter 13 in the first place. To avoid paying your refund to the trustee, you can file a plan modification in order to excuse the tax refund.
The bankruptcy trustee is going to automatically assume that any tax refund is “disposable” as it is an additional income that you didn’t account for when outlining your finances.
For more information from Southern California’s experienced bankruptcy attorneys, call Westgate Law.