Can I Keep My Tax Refund in Chapter 13 Bankruptcy?

Whether or not you are allowed to keep your tax refund in Chapter 13 bankruptcy or whether you must turn it over to the Chapter 13 Trustee depends greatly upon 2 things: (1) where you are located; and (2) how much you are repaying your creditors.

Keeping a Tax Refund in Chapter 13 Bankruptcy: Location, Location, Location!

The reason that location or geography is important in resolving this question is that it is a very "jurisdiction-specific" question. That means that it matters greatly in which Federal District's bankruptcy court you have filed your Chapter 13 bankruptcy case, and, sometimes, even in which region within a Federal District you have filed the case. What is a Federal District? Bankruptcy is a legal process governed by Federal law, not state law. A bankruptcy case is filed in one of 94 different Federal court jurisdictions across the United States and Puerto Rico. Which one you file your case in is determined (usually) by the county you reside in. So, for example, if you reside in Oakland County, Michigan, your Chapter 13 bankruptcy case will be filed in the Eastern District Michigan, Detroit division, as that district's division handles all cases from the counties in southeastern Michigan: Wayne, Macomb, Washtenaw, Monroe, among others. Each district has its own local rules, its own bankruptcy judges, and its own Chapter 13 Trustees. Each district is governed by the previous case-rulings issued a Federal Circuit Court of Appeals. In Michigan (Eastern or Western District), the Sixth Circuit Court of Appeals is the ultimate arbiter of any bankruptcy controversy that is appealed up to that level. Thus, while the same body of Federal law (the US Bankruptcy Code and Bankruptcy Rules of Procedure) governs all bankruptcies wherever they are filed, many questions will be answered differently depending upon where the case was filed because of local rules, local judicial decisions, and the policies of local Chapter 13 Trustees. This is one of those questions. So, while the US Bankruptcy Code defines a tax refund as "disposable income" that must be paid to your creditors through the Chapter 13 Plan, some Chapter 13 Trustees absolutely require it, others are more flexible.

Keeping a Tax Refund in Chapter 13 Bankruptcy: It Depends On What You Pay

The Bankruptcy Code requires that Federal tax refunds must be paid into your Chapter 13 payment plan to provide further repayment to your unsecured creditors if your payment plan, as approved by the court, is providing less than 100% payment of your unsecured debts. It is a common bankruptcy myth that you must repay 100% of what you owe to your creditors through a Chapter 13 bankruptcy. The majority Chapter 13 cases filed are not "100% cases" in which this is occurring, although many are. If you are paying less than 100% to your unsecured creditors through your Chapter 13 plan, you are required to turn over Federal tax refunds.

Keeping Your Tax Refund in Chapter 13 Bankruptcy: Michigan in Particular

In a Michigan Chapter 13 bankruptcy, this is certainly true. In the Eastern District Detroit division, you must turn over your Federal tax refunds to the Chapter 13 Trustee if you are not paying 100% of what you owe to your unsecured creditors through your Chapter 13 Plan. However, if you are paying 100% to your creditors, you do not have to turn the refunds over. A little to the north, in Flint, the Chapter 13 Trustee's policies have been more flexible, depending upon whether the refund is historically received, is very significant, and other factors (subject to change at any moment without further notice reported on this blog posting!). Policies likewise vary in Grand Rapids and other parts of the Western District of Michigan.

Keeping Your Tax Refund in Chapter 13 Bankruptcy: What If You Need It? A Bottom-Line.

All of this said, the bottom-line is that, regardless of whether your Chapter 13 payment plan requires you to turn over your tax refunds, it is still possible to retain them if some need that is reasonable and justifiable arises. For instance, if your roof has collapsed on your home and you need the refund to help repair it without incurring further debt that would upset your Chapter 13 payment plan, a motion or plan modification requesting an order from the court allowing you to retain the refund is possible to file and very likely to succeed. And there are other occasions and justifications for the retention of a refund. But they will all require some motion or pleading filed by your bankruptcy lawyer with the Court, and each such filing can conceivably be objected to by the Chapter 13 Trustee. You will never want to assume that you can keep your refund if your Plan requires you to pay it over. Give your bankruptcy attorney as much advance notice and as much supporting documentation as possible to allow him or her to advise you further. If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.

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If you enjoyed reading "Can I Keep My Tax Refund in Bankruptcy?," please browse our other articles on our main Michigan Bankruptcy Blog.

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