Tax Returns and Refunds in Chapter 13 Bankruptcy

By Derek Prosser

Tax returns and potential tax refunds can be problematic whichever chapter of bankruptcy you file. In Chapter 7 bankruptcy, for example, a refund for a return that has been filed but the refund not yet received is an asset that must be listed in your bankruptcy schedules. In Dallas Chapter 13 bankruptcy, refunds may need to be turned over to pay your creditors, depending on where your case is filed.

So What Happens to My Tax Refunds?: Each year you are in a Chapter 13 case, whether you file a Plano Chapter 13Richardson Chapter 13 bankruptcy or anywhere else, you are required to submit copies of your filed income tax returns to the Chapter 13 Trustee. If you are entitled to a tax refund from those returns, whether and how much of that refund you can keep will depend on where your case is filed.

In the Northern District of Texas (i.e. Dallas County bankruptcy, etc.), you are allowed to keep tax refunds that are less than $2,000. However, the Trustee has discretion in demanding turnover of even small refunds if your Chapter 13 repayment plan is behind on payments. If your refund is larger than $2,000, you will likely be allowed to keep the $2,000, but required to turn over the excess amount for payment to your creditors. There is an exception to this rule, however, in that debtors who are able to show some form of hardship or unexpected expense are often times allowed to keep even the excess portion.

In the Eastern District (i.e. Collin County bankruptcy), the same $2,000 threshold applies. However, if your refund exceeds that threshold by even $1.00, you are typically required to turn over the entire refund. This is where withholding and exemption planning become important as you want to make sure you get to keep at least the allowed $2,000. In some cases, where the refund is due to certain qualifying credits, those portions might be excluded from consideration.

The specifics of each case will determine how and when you will be able to keep your tax refunds in bankruptcy. To know more, contact a Dallas bankruptcy attorney today.

About the Author
Derek Prosser understands that clients need help and need answers and that in order to properly address those concerns, clients need to deal with an attorney first and always, not just an assistant or paralegal.  By effectively counseling from the outset of a case, Toronjo & Prosser Law can anticipate and address potential problems before they arise, as opposed to when they’ve already surfaced (the “Counsel Later” approach), and, in the end, strive for a seamless representation.