Can They Hold My Taxes if My Bankruptcy Was Dismissed?

You may lose your tax refund in bankruptcy.

As a former Chapter 13 bankruptcy case debtor, you've seen that it requires you to adhere to a strict budget while devoting your disposable income to a lengthy debt payment plan. When you initially filed your case, your income tax refund may have been held by the Internal Revenue Service or sent to the bankruptcy trustee. In either case, you're not guaranteed to get it back in light of the dismissal of your case.

Estate

As a general rule, once a court dismisses your bankruptcy case, your assets, including your tax refund, no longer belong to the bankruptcy estate. The bankruptcy estate is a legal entity that's created to hold all your assets while you're in bankruptcy. A person known as the bankruptcy trustee manages the estate to ensure that it's administered in a manner that benefits your creditors' interests.

Chapter 13

You likely didn't plan to dismiss your Chapter 13 case when you filed it. You may have chosen Chapter 13 because it allows you to get caught up on debts, such as current tax obligations, that are nondischargeable in a Chapter 7 bankruptcy. Over the course of three to five years, you generally could have paid your arrearages without worrying about creditor collection activities. During a Chapter 13 bankruptcy, the IRS generally will send your tax refund to the trustee, who may release some of the funds to you while using the rest to pay your creditors.

IRS

If you filed your Chapter 13 bankruptcy and dismissed it while the IRS still had your refund, you probably won't get it back. Even after you filed for bankruptcy protection, the IRS has the right to retain your refund to offset any tax debt that you owe. This right of offset, called a set off in the bankruptcy code, generally is temporary if your Chapter 13 plan provides an adequate repayment plan for the debt.

Administrative Expenses

After your case is dismissed, the trustee will return undistributed cash, such as your tax refund, to you. However, dismissing your Chapter 13 bankruptcy won't guarantee that you'll get the entire refund back. Before closing out your case, the trustee will deduct unpaid administrative expenses. Administrative expenses include such things as your attorney's fees, trustee fees and other bankruptcy-related expenses. Once the trustee deducts these expenses, she will release the remaining balance to you.

References

• American Bankruptcy Institute; Assessing the Success and Failure of Chapter 13 Bankruptcy; Katherine Porter
• Internal Revenue Service: Part 5. Collecting Process
• The Galler Law Firm: What You Should Know About Chapter 13