Chapter 13 Tax Refund

Don’t let Chapter 13 tax return issues hold you back 

Are you seeking proficient guidance and effective solutions for your Chapter 13 tax refund concerns? Look no further than Farmer & Wright, PLLC. Our esteemed legal team of bankruptcy attorneys is here to offer you the legal support and guidance you need to navigate the complexities of Chapter 13 bankruptcy and maximize your chances of retaining your tax refund.

Here at our law firm, we take pride in our deep understanding of bankruptcy laws and regulations, including the nuances surrounding tax refunds in Chapter 13 cases. Our dedicated attorneys are well-versed in the local laws of Paducah, Kentucky and have a proven track record of success in helping clients protect their assets and achieve their financial goals.

We will explore the treatment of tax refunds in Chapter 13 bankruptcy, the exemptions and protections available, the impact on the repayment plan, and the obligations involved. 

Contact Farmer & Wright, PLLC, in Paducah, Kentucky, to schedule a free consultation with one of our experienced attorneys. Let us put our knowledge and skills to work for you, helping you handle the stress and worries of Chapter 13 bankruptcy issues and achieve the best possible outcome for your financial future.

What is Chapter 13 Bankruptcy?

Chapter 13 bankruptcy is an available legal process under the United States Bankruptcy Code that allows individuals with regular income to restructure their debts and establish a repayment plan. It is often referred to as a “wage earner’s plan” because it is designed for individuals with a steady source of income.

In Chapter 13 bankruptcy, debtors propose a repayment plan to the bankruptcy court, outlining how they intend to repay their creditors over three to five years. The plan considers the debtor’s income, reasonable living expenses, and the value of their assets.

Unlike Chapter 7 bankruptcy, which involves liquidating assets to pay off debts, Chapter 13 focuses on creating a structured repayment plan that allows debtors to catch up on missed payments and repay a portion or all of their debts over time.

What is a Tax Refund? 

A tax refund refers to the amount of money a taxpayer overpaid to the government throughout the year, resulting in a refund issued by the tax authority. It is a reimbursement or repayment of excess taxes paid by an individual or entity.

When individuals or businesses file their tax returns, they calculate their tax liability based on their:

• income, 
• deductions, 
• credits, and 
• other factors. 

This calculation determines the amount of tax owed to the government. However, if the taxpayer’s total tax payments, such as withholdings from their paycheck or estimated tax payments, exceed their tax liability, they have overpaid their taxes.

The excess amount, known as the tax refund, is returned to the taxpayer by the tax authority. It is issued through a check or direct deposit into the taxpayer’s bank account. The tax refund represents a return of the taxpayer’s funds withheld or paid in excess throughout the year.

Tax Refund under Chapter 13

Under Chapter 13 bankruptcy, a tax refund is considered part of the debtor’s disposable income and may be subject to bankruptcy. Listed below is a brief explanation of what a tax refund entails in the context of Chapter 13 bankruptcy:

• Treatment of tax refunds in Chapter 13 bankruptcy: In Chapter 13 bankruptcy, tax refunds are generally considered part of the debtor’s disposable income, which is used to fund the repayment plan. Disposable income refers to the income remaining after deducting reasonable living expenses.
• Contribution towards the repayment plan: The bankruptcy trustee may require the debtor to contribute a portion or the entire tax refund towards the repayment plan. That means the debtor must use the tax refund to increase the funds available for repaying creditors.
• Maximizing the benefits: Debtors may work with their bankruptcy attorney to structure the repayment plan that maximizes the tax refund’s benefits. For example, the plan can be designed to coincide with the timing of the tax refund receipt, allowing the debtor to contribute the refund towards the plan and fulfill their obligations.

It is important to note that the treatment of tax refunds in Chapter 13 bankruptcy can vary depending on various factors, including federal and state laws, specific exemptions, and the discretion of the bankruptcy trustee and the court. Consulting with a knowledgeable bankruptcy attorney is crucial to understand how tax refunds will be treated in your specific bankruptcy case and to ensure compliance with applicable laws and regulations.

By including tax refunds as part of the repayment plan, Chapter 13 bankruptcy provides debtors to utilize these funds to repay their debts, ultimately working towards financial stability and a fresh start.

Can I Keep a Tax Refund in Chapter 13?

Ultimately, whether you can keep your tax refund in Chapter 13 bankruptcy depends on various factors, including applicable laws, exemptions, and the specifics of your case. Consulting with an experienced bankruptcy attorney is recommended to assess your situation, provide guidance based on the laws in your jurisdiction, and help you navigate the bankruptcy process while protecting your interests to the fullest extent possible.

Below are the considerations you might take when keeping Chapter 13 tax returns. 

Excusing Chapter 13 Tax Refund in the Initial Plan

You might attempt to create a first draft of the strategy that suggests leaving out tax refunds. Creditors and the bankruptcy trustee can protest because they might see a refund as having more money. You could merely ask for a portion of the refund to be excused to improve your chances of this type of plan authorized. As a result, if your refund is higher than anticipated, you will not deviate from your plan’s guidelines and end up with a windfall by hiding more money from creditors.

If you can provide a compelling, detailed justification for this provision, you may also have a better chance of having a plan that excuses a future return approved. A debtor might occasionally have a large annual expense for which they generally save up a tax refund. 

Since removing a tax refund from a Chapter 13 repayment plan might result in loopholes for a debtor, courts are typically reluctant to approve this plan. If they get more money, they might be able to include it in their tax return and get a bigger refund. A debtor anticipating a sizable tax refund may also have understated the amount required to pay for their essential needs, which could lead a court to view that portion of the plan skeptically.

If the debtor needs to make any of the following payments, the bankruptcy court may also permit them to keep their tax refund:

• a new vehicle or auto repairs,
• unanticipated dental and medical costs,
• a fresh device, or 
• funeral costs.

Keep receipts to prove your costs if the court permits you to keep your refund. To find out your options if you cannot complete your Chapter 13 plan payments, see a bankruptcy attorney.

Modifying a Repayment Plan to Excuse a Tax Refund

You must file a separate plan modification request in the year in question if you want to exempt a specific tax refund from your repayment schedule. You must specify the refund amount and the reason why you require the funds, which must be both urgent and unexpected. 

For instance, you cannot use a refund as an excuse to pay for your regular, ongoing expenses like groceries or electricity. On the other hand, if your car breaks down and needs significant repairs or if a member of your family has a health issue that necessitates increased medical bills, you might be able to get your refund waived. 

What If My Chapter 13 Payment Plan Is a “100% Plan” or Close To It? Will I Be Able To Keep My Tax Refund?

Find out how much your Chapter 13 plan pays your creditors if it does not stipulate that you must forfeit your tax refund. You might not be required to repay your refund if you have already paid off all your debt or are almost there.

For instance, if you pay a minimum of 70% of your “unsecured debt,” you probably will not have to give up your return, and you should not have to if you pay 100% of your unsecured debt in a “100% plan”.

How Do I Find Out What My Chapter 13 Plan’s Percentage Is?

Subtract any “secured debts” from your plan payment, like mortgage and auto loan installments. Secured loans are secured by property that the lender may seize if you default on your payments. The remainder of your computations will be applied to your unsecured debt, such as credit card balances, past-due lease payments, medical bills, and utility overdue. Determine the proportion you must pay to your unsecured creditors. 

Who Makes Up to 100% of the Payments Under the Chapter 13 Plan?

Most Chapter 13 programs pay a tiny amount toward unsecured debt, which is one of their benefits. However, if you belong to either of these two categories, you will unquestionably pay a higher percentage:

• You earn a great deal of money and have little debt. Suppose two applicants each owe $100,000 and list the same monthly expenses. However, after expenses, Filer A has $75,000 left over to settle an unsecured loan, but Filer B only has $7,000 remaining. In this instance, Filer A will contribute to a 75% plan, whereas Filer B will make a 7% contribution.
• You own valuable property not covered by bankruptcy exemptions. If your credit card company intends to seize your $450,000 vacation condo because they have a $45,000 money judgment against you, or if you do not have a bankruptcy exemption to safeguard the apartment, you must pay unsecured creditors $450,000 or the $45,000 you owed, whichever is less, if you file for Chapter 13 bankruptcy to stop the seizure. In a 100% plan, you pay $45,000 over five years and keep the property.

Chapter 13 Tax Return Requirements

All federal, state, and local tax returns must be filed timely before and after your Chapter 13 bankruptcy petition has been submitted. The Chapter 13 trustee will not prepare or file your tax returns on your behalf. The Chapter 13 trustee may periodically request copies of your federal, state, and local tax returns throughout your plan. 

You are responsible for providing any documentation that the trustee requests from you. If you have trouble filing your tax returns, contact your bankruptcy attorney.

Call Us to Help with Chapter 13 Tax Refund in Paducah, KY!

Are you struggling with Chapter 13 tax return issues and feeling overwhelmed by the complexities of bankruptcy? Farmer & Wright, PLLC is here to alleviate your concerns and provide assistance. Our team of dedicated attorneys understands the challenges you’re facing and is committed to helping you protect your tax refund and secure your financial future.

At Farmer & Wright, PLLC, we pride ourselves on our extensive experience in bankruptcy law, specifically Chapter 13 cases. We know how important your tax refund is in meeting essential living expenses and regaining control of your finances. Our attorneys deeply understand the laws and regulations surrounding tax refunds, allowing us to develop personalized strategies tailored to your unique circumstances.

Trust Farmer & Wright, PLLC as your dedicated legal partner and advocate. Contact Farmer & Wright, PLLC, in Paducah Kentucky, and schedule a free consultation and take the first step towards a brighter financial future.

Let us provide the comprehensive legal representation you need to overcome bankruptcy challenges and regain peace of mind.

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