In a chapter 13 bankruptcy case, the debtor (the legal term for a person who files for bankruptcy) pays all of their disposable income, each month, towards their debts in a three to five year repayment plan.
The debtor’s disposable income is the amount of money the debtor has left over after deducting their allowable monthly expenses from their monthly income. After successfully making all of their payments in their payment plan, the debtor receives a discharge of their remaining debts. Because, in most chapter 13 cases, the debtor pays a small monthly amount towards their debts, and receives a discharge of the majority of their debt when they complete their plan, a chapter 13 is often a fantastic option for those struggling to pay their debts and meet other financial obligations.
In a chapter 13 bankruptcy case, the debtor is not required to turn over any of their property but must pay the trustee all of their remaining disposable income, as described above. The courts have ruled that income tax refunds are essentially a form of “income” that the debtor must turn over to the chapter 13 trustee to pay creditors. Notably, property tax refunds and renter’s rebate tax refunds are not considered income under bankruptcy law, and are not required to be turned over to the chapter 13 trustee as income.
In recognition that many debtors rely on their annual tax refunds to help cover needed bills and expenses, the chapter 13 trustees in Minnesota allow debtors to retain a portion of their State and Federal tax refunds. If the debtor is a single tax filer, they are permitted to retain $1,200 from their combined State and Federal tax refunds. If the debtor is married and files their taxes jointly with their spouse, they are permitted to keep up to $2,000 of the refund. In addition, the debtor may keep any portion of their tax refund that comes from the Federal Earned Income Tax Credit and any portion that comes from the Minnesota Working Family Credit. Their remaining refund must be turned over to the trustee as an additional payment to their creditors. In some cases, the trustee may allow the debtor to retain a larger portion of their tax refund to help with necessary and/or unforeseen expenses (ie an expensive car repair).
In other cases, the trustee may allow the debtor to treat their tax refunds as income in order to allow them to keep their annual tax refunds. This is most likely to be allowed in cases wherein the chapter 13 debtor has a modest income from employment and a lot of monthly expenses (common in cases where the debtor has multiple dependents). In such cases, the debtor would typically average out their anticipated annual refund per month by dividing the refund by 12 and adding it to their monthly income. For example, a low-income debtor with 4 children who typically receives a combined refund of about $4,800, could average that annual refund per month by dividing it by 12 months to get an additional income of $400. So long as the debtor can find a sufficient amount of monthly expenses to match the income ($400 extra in expenses) they should be able to keep their monthly payment the same and keep their annual refunds up to $4,800.
How much of a tax refund a person can keep vs have to give to the trustee to pay creditors in a chapter 13 case can be complicated. For this reason, it is always a good idea to consult with an experienced bankruptcy attorney before filing for bankruptcy.
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The attorney can best advise how the tax refunds will be handled based on that individual’s unique financial circumstances. Speaking of experienced attorneys, LifeBack Law Firm has a new location in the historic Cathedral Hill neighborhood of Saint Paul, specifically located at 370 Selby Ave., Suite 224, St. Paul MN 55102. Come visit us there, or online, at lifebacklaw.com!
