Will I Lose My Tax Refunds In Chapter 13 Bankruptcy?

It is that time of year, again. Tax filing season is upon us. If you find yourself in a Chapter 13 Bankruptcy in Minnesota, you may be wondering if you are able to keep your tax refunds. The answer to this question is determined by what your specific plan calls for. If your Chapter 13 plan is silent as to tax refunds, presumably you are allowed to retain possession of 100% of your tax refunds. However, if your plan has specific provisions dealing with excess tax refunds, you must comply with them.

     I would suggest that the vast majority of Chapter 13 plans in Minnesota allow debtor(s) to retain the first $1,200.00 of any refund if it is a single filing or the first $2,000.00 if it is a joint tax filing plus any refunds attributable to the Earned Income Tax Credit or Minnesota Working Family Credit.

     These excess amounts due to Chapter 13 trustee are not seen as reducing your total plan payments at all. They are seen as “additional” plan payments. So, for those who think paying in excess tax refunds will reduce your plan payment or plan length, it will almost certainly not (unless you are in a pay in full plan).

     Personally, I think the carve-out for excess tax refunds is fair to debtors, creditors, and trustees. The whole idea of a Chapter 13 Bankruptcy is creditors are supposed to benefit from a rise in income. Apportioning tax refunds this way allows debtors to retain some of the excess refunds first and also pays over to trustees/creditors any amounts above a certain threshold.

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