Can I Keep My Tax Refund in Chapter 13 Bankruptcy?

Usually, you must turn over your tax refund to the Chapter 13 trustee. But there's a way you might be able to keep it.

By , Attorney

Whether you can keep your tax refund in Chapter 13 bankruptcy will depend on your plan and the amount you're paying your creditors. However, if you're facing an unexpected hardship, you can ask the bankruptcy court to modify your Chapter 13 plan and excuse the tax refund payment.

Find out whether you can keep your tax refund after filing Chapter 13, if you're eligible for Chapter 13, and what to expect in a Chapter 13 bankruptcy case.



Will I Lose My Income Tax Refund in Chapter 13?

Whether you must turn over your tax refund will depend on your particular case. In Chapter 13, creditors are entitled to receive all extra or "disposable income," so you should plan to give your tax return to the court-appointed Chapter 13 trustee each year to pay creditors.

However, depending on your repayment plan provisions, your trustee, and how much debt you're paying, you might be able to keep your income tax refund if:

  • keeping refunds is built into your plan
  • you qualify to "excuse" a tax refund turnover
  • you're paying at least 70% of unsecured debts, or
  • you're paying all unsecured debts through a "100% plan."

If you don't know what your plan requires, your best bet is to start by talking with your Chapter 13 bankruptcy attorney.

How to Excuse a Tax Refund in Chapter 13 Bankruptcy

You can ask the bankruptcy court to excuse your responsibility by filing a Chapter 13 plan modification if you're required to pay your tax return. You must file a separate plan modification yearly that includes:

  • the tax refund you'd like to keep
  • the refund amount, and
  • the financial hardship you're facing.

Bankruptcy courts tend to excuse a tax refund turnover if you need it for something necessary and unexpected. Buying food, making your car payment, or paying anything else included in your original Schedule J: Your Expenses budget likely won't be approved without some other hardship factor.

Example. Ashley pays $1,000 per month to the trustee. Her income from work barely covers her expenses and plan payments, and she falls behind a bit each month. She needs her tax refund to catch up on her electrical bill.

The court might excuse Ashley's tax bill if she shows her expenses increased due to inflation or another event beyond her control, but not because of a lack of planning. The court might also agree to excuse a tax refund if she needs to pay for any of the following:

  • car repairs or a replacement vehicle
  • a new major appliance
  • funeral expenses, or
  • unexpected medical or dental bills.

Document expenditures by retaining receipts if you receive court permission to keep the refund. Learn about options if you can't make your Chapter 13 plan payments.

If Your Chapter 13 Plan Is a "100% Plan" or Close to It, You Can Probably Keep Your Tax Refund

If your plan doesn't state whether you must turn over your tax refund, check how much your plan pays creditors. You might not have to hand over your refund if you're already paying everything you owe or close to it.

For instance, you probably won't have to relinquish your return if you're paying 70% or more of your "unsecured debt" and shouldn't need to if you're paying 100% of your unsecured debt in a "100% plan" (as compared to paying 0% in a "zero percent plan").

Who Pays 70% to 100% of Chapter 13 Plan Payments?

Most plans pay a small percentage toward unsecured debt—it's one of the benefits of Chapter 13. However, if you're in one of these two groups, you likely pay a much higher percentage:

You earn a lot and have relatively low debt. Suppose two filers owe $100,000 and can claim the same monthly expenses. But, after expenses, filer A has $75,000 of disposable income to pay toward unsecured debt, and filer B has $7,000. Filer A will pay into a 75% plan, and filer B will pay into a 7% plan.

You own valuable property bankruptcy exemptions don't protect. Assume your credit card company has a $45,000 money judgment against you and plans to seize the $450,000 vacation condo you own outright. You file for Chapter 13 to stop the seizure, but because you can't protect the apartment with a bankruptcy exemption, you must pay $450,000 to unsecured creditors or the $45,000 you owe, whichever is less. You pay $45,000 over five years in a 100% plan and keep the condo.

Here's How You'll Know If You Have a 100% Plan

You'll know because you and your bankruptcy lawyer would have discussed it at length, and the conversation would have made a "big" impression on you, at least financially. It would have gone something like this:

Client: I need to file for bankruptcy because I can't make my monthly payments. I owe about $60,000 altogether, and I have $250,000 in equity in my house. What are my options?

Attorney: Because our state's homestead exemption is $50,000, you have $200,000 of unprotected equity in your home, which puts it at risk. Unprotected property translates into money your creditors are entitled to receive, no matter which bankruptcy chapter you file.

If you file for Chapter 7, the trustee would sell your house and use the proceeds to pay your creditors. You want to keep your house, so that isn't an option.

You'd be better off filing for Chapter 13 because you can keep the house. But it will be expensive. Because you have more unprotected equity than unsecured debt, you must pay every penny of unsecured debt you owe in a "100% plan" or $1,000 per month for 60 months.

Client: When you say I must pay everything I owe through the plan, does that include my mortgage? That would be too much!

Attorney: That's the good news. No, you don't have to pay off your mortgage because it's a "secured debt." You only pay unsecured debts in full. You'll continue paying your monthly mortgage payment as you typically do. Nothing more.

Learn more about calculating Chapter 13 repayment plans.

Chapter 13 Tax Return Requirements

Chapter 13 debtors are responsible for providing tax filings for the four years before the bankruptcy and filing each year during the plan. The court-appointed Chapter 13 trustee will verify your tax filing status at the beginning of the case, so be prepared to give the trustee copies of returns or tax transcripts.

Your bankruptcy attorney will explain whether your trustee will request copies of tax returns during the plan period because trustee requirements vary.

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