In the case Knighton, Brent E. and Kelly L. debtors in Chapter 13 bankruptcy were forced to change their bankruptcy payment plan because they received a $2,452 tax refund. The trustee who had a policy of exempting tax refunds of $2000 or less requested that the excess $452 be used to repay creditors in the Chapter 13 bankruptcy. The bankruptcy court ruled that the tax refund was disposable income and should therefore be used (to the extent requested by the trustee) to repay creditors in the Chapter 13 bankruptcy.
This is a tough case for debtors in Chapter 13 bankruptcy because many workers use their tax refunds to pay for essential items needed by the household. Losing that tax refund money during a Chapter 13 bankruptcy can be a huge financial blow.
Debtor’s filing for Chapter 13 bankruptcy should discuss with their bankruptcy attorney how tax refunds and tax filings will be handled during Chapter 13 bankruptcy. If you’re a debtor who is considering Chapter 13 bankruptcy and you expect to receive a large tax refund while you’re in Chapter 13 bankruptcy, discuss this issue with your bankruptcy attorney before you file for Chapter 13 bankruptcy.
Your bankruptcy attorney can help you create a plan that will help you protect your tax refund as much as possible during Chapter 13 bankruptcy.