A debtor filing a Chapter 13 bankruptcy may receive income and property tax refunds during their 3-5 year payment plan. In some instances, these refunds are allowed to be kept; in other instances, these refunds must be turned over to the debtor’s Chapter 13 trustee and used to pay creditors.
Generally, in a Chapter 13 bankruptcy, a debtor is not required to turn over property to the bankruptcy trustee. Instead, debtors generally only make monthly Chapter 13 payments to the trustee, which is used to pay down a portion of their debts. However, income tax refunds that a Chapter 13 debtor may receive from either the state of Minnesota or the IRS are generally considered additional income, not property, and hence must be turned over to the trustee, as an additional payment to creditors. In contrast, property tax refunds are not considered income, and the Chapter 13 trustee often allows the debtor to keep these property tax refunds, rather than require the debtor to turn them over to pay creditors.
In Minnesota, the Chapter 13 trustee will allow the debtor to keep $1,200 from any income tax refund they receive, if the debtor is an individual tax filer. The trustee will allow the debtor to keep $2,000 if the debtor files taxes jointly with their spouse. On top of that, the Minnesota Chapter 13 trustee’s office will allow the debtor to retain any portion of the tax refund that comes from the Federal Earned Income Tax Credit and the Minnesota Working Family Tax Credit. However, any other portion of the debtor’s tax refunds, must be turned over as an additional payment to their creditors, on top of what they will pay as their monthly Chapter 13 payment. Also, if the debtor has a special need for the tax refund when it is received, the trustee will often allow the debtor to keep an additional amount to meet their special financial need. An example of this might be if the debtor has an unforeseen medical expense or necessary home repair.
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