Last year, I discussed what happens to income tax refunds in New York bankruptcy, but that post doesn’t address specific concerns that chapter 13 debtors might have. Now that 2015 is here and people are looking through their tax forms (you are doing that, right?), it’s worthwhile to discuss the topic for a few reasons. Many Americans rely on income tax refunds as a kind of savings system that gives them a large lump sum of money that they use for various projects. (Sometimes that includes filing bankruptcy.)
First of all, if you are filing an uncommon 100 percent repayment plan, then you will be able to keep all of the income tax refund for yourself because you have already committed to repaying all of the debt you owe with your disposable income as it’s currently calculated.
In most other chapter 13 cases, though, the trustee will insist that the debtor turn over the refund. It’s considered ordinary disposable income that will go to the unsecured creditors. If the income tax refund can pay for a dire need that would otherwise be paid with additional debt, like a replaced vehicle or roof, then it’s possible to move the bankruptcy court to use the income tax refund for that purpose.
Debtors can try to shrink their expected income tax refunds if it’s principally payroll tax withholding. By reducing the prospective large refund to a negligible one, the income would be classified as normal income (as it flows to the debtor’s paycheck) rather than disposable income (the lump sum from the IRS).
Chapter 13 debtors may also try to protect tax refunds by taking advantage of wild card or cash exemptions if they choose not to take a homestead exemption. It’s discussed in the earlier post, but in general, the federal exemptions are more charitable to debtors than New York’s exemptions. Debtors should also be aware that money from the Earned Income Tax Credit (EITC) or the child tax credit can be protected by these exemptions as well. Otherwise, the trustee will take them for the creditors. Debtors can attempt to have the IRS make advance payments on the EITC to their employers to keep the extra income.
Strategizing for how to handle an income tax refund in chapter 13 is a compelling reason to have an experienced New York bankruptcy lawyer manage your case.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Chapter 13 Bankruptcy Lawyer Brooklyn NY Bruce Weiner for a free initial consultation.
