Will I Lose My Tax Refund by Filing Chapter 13 Bankruptcy?

February 12, 2010

 

A Chapter 13 bankruptcy is a repayment plan that lasts three to five years. During that time the debtor is required to devote all disposable income to the repayment of debt. Most bankruptcy trustees and courts consider tax refunds part of the debtor’s disposable income that is over-withheld and should be paid into the Chapter 13 plan. However, instead of reducing the amount payable under the debtor’s plan, tax refund money is paid to unsecured creditors that would otherwise not be paid. If the debtor is paying a 100% repayment plan, the trustee will not request turnover of any tax refunds.

Some courts have approved a provision in the Chapter 13 plan that requires the Internal Revenue Service to forward any tax refund to the trustee’s office. However, at least one bankruptcy court has found this practice to be unlawful. In United States v. Carroll, No. 2:09-cv-13505 (E.D.Mich. Jan. 20, 2010), the bankruptcy court concluded that the IRS was not a party to the debtor’s chapter 13 case and did not have an opportunity to object to the plan. Additionally, as a part of the United States government the IRS possesses sovereign immunity that it did not waive.

Keeping your money and avoiding an income tax turnover may be as simple as adjusting your paycheck withholding. By speaking to a tax professional you may be able to predict your tax liability and put more money in your pocket each payday. However, be careful to avoid a situation where you do not withhold enough taxes and end up with a large tax bill at the end of the year.

If your tax refund is largely due to an Earned Income Tax Credit (EITC), the IRS allows tax payers to request an advance payment of the EITC. Information regarding this advance payment program can be found on the IRS website.   If you qualify, your employer will add additional money to your take-home pay each paycheck.

If you want to avoiding surprises during your Chapter 13 bankruptcy, seek out and hire an experienced bankruptcy attorney. An experienced bankruptcy attorney can discuss your financial situation with you and help you keep your hard-earned money for your family.

 

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