Chapter 13 is considered the debt consolidation chapter of the bankruptcy code for individuals with regular income. As such, a debtor is paying back creditors over an extended period of time through a three or five year repayment plan. Debtors are often concerned about whether they will be required to turn over their tax refunds each year during this Chapter 13 repayment plan. The short answer is maybe.
In certain bankruptcy districts or divisions, the Chapter 13 Trustee may review the debtor’s tax return each year and, if a refund is due, modify the Chapter 13 plan to require the refund be paid into the plan. In other districts or divisions, the Trustee will never ask for this review and the debtor will be able to keep the yearly refund. An experienced bankruptcy attorney will be able to advise you whether the Chapter 13 Trustee in your district or division will require you to turn over your refund each year. If you happen to reside in a district or division where you will be required to turn over your tax refund to the Chapter 13 plan, there is a solution. You can simply adjust the withholding taxes from your paycheck to receive more of your wages each pay period instead of receiving it back in a tax refund once a year. This method will take some planning on your part, but with the help of a tax advisor and your bankruptcy attorney, it can provide satisfactory solution to the problem.
If you are considering a Chapter 13 to address your financial problems but are concerned about the effect on your tax refund, please contact one of our locations nearest you for a free, confidential consultation with one of our experienced, licensed attorneys.