Can You Keep an Income Tax Refund Already Received When You File Chapter 13?

Many debtors figure out how to reduce their tax refund during bankruptcy.

The bankruptcy trustee requests the tax refund so that the money can be distributed to creditors. The trustee does not usually demand the most recent tax refund if the case is filed months after the tax refund was received. There are ways to keep a tax refund if the case is filed shortly after receipt of the money. The debtor needs court approval to spend any tax refunds received after the case is filed.

Necessary Expenses

Speak with a bankruptcy attorney about keeping the tax refund before filing the bankruptcy case. Many debtors use their income tax refund to pay for attorney fees and cover the costs of the bankruptcy filing. If the tax refund is needed to pay for other necessary expenses, the debtor does not have to submit the money to the trustee when the case starts. Inform the trustee how the money was spent and keep documentation to verify the amount of the expenses.

Bankruptcy Exemptions

Find out if there are any federal or state exemptions that cover the tax refund received. Claiming an applicable exemption would keep the trustee from demanding the tax refund and the money cannot be distributed to creditors. Figure out if it is more advantageous to utilize a federal or state bankruptcy exemption. The exemptions can make it possible to claim the entire refund or at least a portion of it.

Changing Deductions

When the debtor decides to file for bankruptcy at some point in the future, he has time to change the number of deductions claimed on his taxes. Contact the employer and make the necessary changes to the tax documents on file. The debtor will receive more money directly in his pay checks and the amount of the tax refund will be reduced once the yearly taxes are filed with the IRS. This is another way to ensure creditors receive less money after turning over the tax refund to the trustee.

Motion to Retain Tax Refund

After the case is filed, the debtor must receive permission from the bankruptcy court before spending any future tax refunds. Bankruptcy attorneys charge an additional fee to file a Motion to Retain Tax Refund with the court. Even after the motion is filed, there is no guarantee that the motion will be granted. The court may allow a debtor to keep the tax refund to pay for unexpected emergency expenses such as medical fees or car repairs. Provide a copy of the tax return and documentation to verify the amount of the expense upon request by the attorney or trustee.

References

• U.S. Courts: Chapter 13 Individual Debt Adjustment
• Cornell University Law School: §1325 Confirmation of Plan
• Cornell University Law School: Federal Rules of Bankruptcy Procedure