As a bankruptcy attorney, we regularly hear clients ask, “Can the Chapter 13 trustee keep my tax refund?” The answer is more complicated than a simple “yes” or “no” so it is best to schedule a consultation to go over the details of your situation.
People rely on tax returns
Many people rely on their tax refunds to accomplish a number of things from family vacations to purchasing a new vehicle, to paying down debt. As such, it is no surprise that there is a concern that they may have to turn over the tax refund to the trustee in a Chapter 13 Bankruptcy.
As a bankruptcy attorney, we know that nothing is set in stone and therefore it is important to evaluate each case on its merits. For that reason, this advice applies only to general situations and somebody seeking a specific answer to this question needs to schedule a consultation in which their questions can be answered with specificity.
Tax returns, as it applies to a Chapter 13 Bankruptcy filing is one of those many areas of the law that depends on the circumstances surrounding both events, the filing of the taxes and the filing of the Chapter 13 Bankruptcy, to determine whether or not the Chapter 13 Bankruptcy trustee can take and keep the filer’s tax refund.
This year’s refunds
If a client has already filed a tax return and is expecting a refund, and then filed Chapter 13 Bankruptcy there is a solid chance that the bankruptcy lawyer will not be able to protect that return from being considered part of the estate, seized and then kept by the trustee, and used to pay off debts. It is important to remember that a Chapter 13 Bankruptcy is designed to help pay down debt; and any influx of capital, tax returns included, could be used for that purpose.
In other words, if a person has already filed a tax return for 2016, and is planning to file a bankruptcy in 2017 without having received the refund already, there is a significant chance that the trustee will, in fact, keep the tax return and use it to pay off unsecured creditors.
As with anything having to do with the law, a bankruptcy lawyer will always advise a client to plan ahead when it comes to tax returns and bankruptcy filings. If a person finds that their business is undergoing significant losses and is considering a Chapter 13 Bankruptcy, it is appropriate to reduce the amount of tax paid so as to have a lower tax refund. Similarly, from a personal perspective, a person preparing to file a Chapter 13 Bankruptcy could benefit from taking the least amount of deductions possible and paying the lowest amount of taxes.
This allows the filer to have the money in hand on a monthly basis, instead of relying on a lump sum tax refund which could be seized and used by the bankruptcy trustee for unsecured debts. Planning is key when considering the question “Can the Chapter 13 trustee keep my tax refund?; because the answer is yes unless you work with your bankruptcy attorney on timing.
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Note: This is for information purposes only and does not constitute legal advice.