What happens to my tax refund in a chapter 13 bankruptcy?

It’s complicated.  Plan on losing all but $1,000 of it for the next 3-5 years.

And don’t forget, when you pay this tax refund money into your chapter 13 case, it does NOT pay off your plan early.  It goes into a pool to pay your unsecured creditors a little bit more.  So it does NOT shorten your bk plan at all.  

In a chapter 13, we normally propose that you keep the first $1,000 of your tax refund each year (and maybe the first $2,000 if you get the EIC or ATC).  The chapter 13 plan language reads like this:

For the next three tax years of  xxxxxxxxxx for below median cases and the next five tax years xxxxxxxxxx for above median creditors, the Debtors shall pay into the Plan yearly state and federal tax refunds that, when combined, exceed $1,000 or $2000 in the event the refunds are a result of receiving the Earned Income Credit (“EIC”) and the Additional Child Tax Credit (“ACTC”) or either, then the excess of $2,000 shall be contributed to the Plan.

This means that in most cases if your income is below the median income figures, that you will lost a part of your refunds for the next 3 years.  If your income is high, then you will lose a portion of your refund for the next 5 years.

There is also a more complex option that goes like this:

The following tax years are proposed to be contributed [xxxxxxxxxx].  On or before April 30 of each applicable year, debtors shall provide the Trustee with a copy of the first two pages of filed state and federal tax returns.  Any required tax refund contributions shall be paid to the Trustee no later than June 30 of the year the applicable return is filed.

For the first tax year contribution xxxx, debtors shall contribute to the Chapter 13 Trustee the pro rata portion of the tax refund that would be contributed in a chapter 7 case.  This amount shall be used to satisfy the 11 USC § 1325(a)(4) requirement and shall be disbursed to unsecured creditors in Class 3, Class 4 and Class 6  as listed in Local Rule 2083-2(e) as soon as possible.  In the event of conversion to a chapter 7 case, tax refunds on hand will be submitted to a chapter 7 trustee as an asset of the bankruptcy estate.

For the second and third tax year contribution, debtors are authorized to retain any Earned Income Credit and/or Additional Child Tax Credit.  Debtors shall contribute any refund attributable to over-withholding of income tax that exceeds $500.  However, debtors are not obligated to pay tax overpayments that have been properly offset by a taxing authority.  Tax refunds paid into the plan may reduce the plan term to no less than the Applicable Commitment Period, but in no event shall the amount paid into the Plan be less than thirty-six (36) Plan Payments plus all annual tax refunds required to be paid into the plan.

In this scenario, you may pay more from your first year tax refunds and then may pay less on your next two years.

As I said, it’s complicated.  Just plan on losing part of your tax refunds for 3-5 years.