Chapter 13 Bankruptcy and Tax Refunds

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Chapter 13 Bankruptcy and Tax Refunds

When you file for bankruptcy, any property you own becomes a part of the bankruptcy estate which is overseen by the bankruptcy trustee. Many people are worried about any tax refund or personal injury claim they receive during their bankruptcy since it could be used to pay your creditors. However, lawyers of Dallas based bankruptcy law firm Recovery Law Group inform that bankruptcy laws allow you to modify your Chapter 13 plan in some cases to excuse payment of tax refunds.

You are expected to list your income, your assets, and your debts when you file for a Chapter 13 bankruptcy. This is then used to calculate your disposable income which is used to pay your unsecured nonpriority creditors. Disposable income is calculated by deducting all reasonable and essential expenses like food, shelter, transportation from your monthly income. Since priority and secured debts are to be paid every month, any money that remains is termed as disposable and used to clear your unsecured debts over the course of your repayment plan.

Any tax refund that you get in the middle of the bankruptcy can be considered as disposable income as the funds were not included in the income-expense calculations. Moreover, since you were managing your necessary expenses and planned payments with your monthly income, a tax refund is surplus income which can be used to pay your creditors. However, if you could prove that the tax return isn’t disposable and is required by you to take care of some unexpected bills, the court might allow you to keep the refund money. For more details on this consult bankruptcy lawyers at 888-297-6023.

Getting your tax refund excused by the court

Any tax refund you get during your Chapter 13 bankruptcy Dallas needs to be justified as essential for your use, else it will be termed as disposable income by the bankruptcy trustee and used for paying your unsecured debts. You can modify your bankruptcy plan to excuse a tax refund with a reasonable excuse. A separate plan needs to be filed for every tax refund modification you plan to take. The modified plan should include which specific tax refund you would like to be excused, the amount of the refund along with a reason specifying why you need to keep the refund money.

A tax refund is granted only if you can prove that the expense is unexpected and essential for your day-to-day activities and that you will not be able to afford it on your regular income. A respite might be available for reasons like:

  • Unexpected medical expenses for yourself or your dependents;
  • Car repair or a down payment for replacement vehicle;
  • Any appliance repair or replacement;
  • Funeral expenses.

Having proper documentation for how you spent the money after getting the refund by the court might come in handy when you need to file a plan for another refund. Alternately, you could excuse tax refunds by not committing any tax refunds in the plan. However, this might cause the bankruptcy trustee as well as creditors objecting to it unless you could give a compelling reason (large annual expense) or you limit the amount in the plan so that you don’t receive more money than specified. Consulting with a bankruptcy attorney can open more vistas for you on how to save tax refunds.