The answer to whether you can keep a tax refund in bankruptcy will be different in Chapter 7 versus Chapter 13.
The easiest thing to do when you file Chapter 7 bankruptcy and have a tax refund coming is to get the refund and spend down the money prior to filing. This is known as proper exemption planning prior to filing bankruptcy. This way the refund is converted into cash and the cash can be reduced till to little or no value before filing.
Therefore, there is no issue with you keeping the tax refund because you have spent it legitimately before you filed bankruptcy. These expenditures cannot be reversed, assuming they were proper.
However certain times you might have a tax refund owed to you but you do not have the ability to wait to file the case. A common example would be if you’re facing a garnishment, repossession, or foreclosure.
In the instance, you filed a chapter 7 while the tax refund has not yet been paid to you so that tax refund in its full amount is an asset of your bankruptcy estate.
The refund it can be re-can be taken by your trustee if you cannot exempt it all. If you cannot exempt all of your tax refund, your trustee could take the non-exempt portion. That is why it is important to know the amount you are allowed to exempt before you file bankruptcy. It is also important to know the amount of your anticipated tax refund.
In a Chapter 13 bankruptcy, the process is very different. In a chapter 13, your refund is considered as additional monthly disposable income.
Since in a Chapter 13 you have to commit all your monthly disposable income to your trustee through monthly plan payments, theoretically your tax refund money should be forfeited your trustee. However, you can ask the court to retain your tax refund.
In a Chapter 13 bankruptcy, this process will be very specific. Each district does things a little bit differently. Here in the Northern District of Georgia, you can keep a tax refund of $1,500 or less without even filing a motion. If you wish to retain more than $1,500, you will have to file a motion to retain your tax refund.
The trustee will want to know why you need more than $1,500. You will then need to show your trustee either some extraordinary reason you need to keep the funds, like that your car broke down or your air conditioning unit blew out. If you’re behind in your ch. 13 trustee payments, the money would need to be forfeited to replace the missed trustee payments.
Therefore, it is going to need to be very fact specific. Whether you can retain all or a portion of your tax refund in Chapter 13 bankruptcy is up to the court.