One of the most popular questions I get from my Chapter 13 bankruptcy clients is “Can I keep my tax refund or will the trustee take it?”
The answer is maybe.
While bankruptcy is a federal law, there are always elements of your local court rules that are incorporated into your case. The issue of whether you can keep your tax refund while in Chapter 13 is very specific to your district.
Here in the Northern District of Georgia Bankruptcy Division, the trustees and judges routinely approve plans that allow the debtor to keep up to $1,500 of a federal tax refund. However, there are certainly lots of districts throughout the country that are not as generous.
The theory behind the debtor potentially not being able to keep her entire tax refund is she must commit all of her “disposable monthly income” to the Chapter 13 plan. Therefore, is a debtor who is overpaying her taxes by $250 per month in order to receive a $3,000 refund, committing all of her disposable monthly income?
In other words, if she netted an extra $250 per month because of how she adjusted her taxes, she would be expected (depending on some other case specific factors) to contribute all $250 of that towards her plan payment. In that case, she would get no refund, so she wouldn’t have a refund to ask the trustee to keep.
Therefore, if she adjusts her tax withholding in a different fashion so she nets $250 less per month but receives a $3,000 refund, she would end up $3,000 ahead of the debtor who does things differently.
Typically what happens in the Northern District of Georgia is the debtor is allowed to keep up to $1,500; however, if she is entitled to a larger refund and wants to keep it, she has to show why she incurred an extraordinary expense and needs it. Examples of this are major car repairs, home maintenance issues or medical expenses.
Peter Bricks is a personal injury and bankruptcy attorney in the metro Atlanta area.