Chapter 13 Bankruptcy Tax Refund

Chapter 13 is a repayment plan wherein the debtor is provided with the option to repay the amount due to his creditors over three to five years depending on the circumstances. Where the monthly income of the debtor is less than the state median limit, then the plan will extend for three years. But, where the monthly income is more than the state’s prescribed median limit, the plan gets pushed for five years, provided the debtor enjoys the presence of stable disposable income.

With the repayment plan based on the actual financial condition of the debtor, and as it takes into account his monthly payments and results in an automatic stay from any legal action by the creditor, it is advantageous.

Depending on the circumstances surrounding your case, you may be forced to refund the whole of the tax refund, or a part of the refund during the term of repayment. However, there may be times where you are entitled to your whole amount due as tax refund. Based on the decision of the Court, the bankruptcy trustee makes the decision on the allocation of the tax refund.

A debtor can keep all of the IRS refund if his disposable income is capable of meeting the amount due to the creditors set by the repayment plan throughout the repayment period. On the other hand, where the debtor is not in possession of adequate time to pay the debts, you may be given the option to make a part payment of the outstanding amount. In such circumstances, the trustee utilizes half of the refund to pay off the debts that are not entitled for full payment.

Any negligence from the part of the debtor to transfer the amount received as tax refund to his Chapter 13 trustee will result in dire outcome. The trustee is delegated with the authority to proceed with a motion in the Court to dismiss your bankruptcy case. This will hit a major blow on your move to get your debts discharged. So, seek the advice of a lawyer and remain abreast of the clauses related to tax refunds.