When you file Chapter 13 bankruptcy you are committing to putting all of your disposable income towards the repayment plan which can last from between three years and five years. Since your income tax refunds are considered income that you have merely deferred by ensuring you have had sufficient amounts deducted from your pay to cover your tax liability, any balance is returned to you after you file your taxes. Your Kennesaw bankruptcy attorney may provide you with some guidance about what happens to your tax refunds when filing Chapter 13; some of the options include:
- Allocating refunds to future taxes – you can designate any tax refund to future tax liabilities when you file your return. In these cases, the bankruptcy trustee cannot access these funds since they are committed to the Internal Revenue Service (IRS).
- Using funds for immediate expenses – in some cases, your Kennesaw bankruptcy lawyer can help you exempt your tax refund from being used towards your Chapter 13 plan. This may be done by using it for unexpected medical expenses, repairs on your vehicle or appliances or other necessary expenses. This may be very easy to do since your disposable income will be tied up in your plan.
- Social refund exemptions – in some cases, taxpayers have been able to get a tax refund due to dependent child and Earned Income Tax credits; in these cases, the refund may be exempt from the Chapter 13 trustee.
Keep in mind, your Kennesaw bankruptcy attorney may be able to negotiate an agreement with your trustee to allow you to keep your tax refunds. It may also be a good idea to reduce your exemptions until your plan is fully paid and your remaining debts are discharged in order to reduce the amount of your refund.
Understanding Disposable Income
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In nearly all cases, when you develop your Chapter 13 payment plan, your Kennesaw bankruptcy attorney will assist you in determining the amount of your disposable income. In most cases, this will include any tax refunds that are expected and in the case of an unexpected refund, the trustee may not be able to seize the refund.
The bankruptcy trustee will calculate your disposable income based on your net pay and from that they will deduct ordinary expenses including utilities, transportation costs, cost of clothing and food costs. In most cases, they will also take into consideration any amounts that are foreseeable refunds since they are part of your income.
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The rules about tax refunds are slightly different for both Chapter 7 and Chapter 13 bankruptcy and they can be confusing. Whether you have filed your taxes and are anticipating a refund or you are uncertain about how to handle a recent tax refund when you are considering bankruptcy, contact Roger Ghai, a bankruptcy attorney in Kennesaw at the Law Offices of Roger Ghai at (770) 792-1000; I can help answer your questions and help you determine the best course of action based on your individual circumstances. I can help you determine if it is necessary to shield your tax refund in a GA Chapter 13 bankruptcy filing.
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