Tax refund dilemma

[kz2011]

OK so we filed back in 2011 for a chapter 13 and according to our Trustee our Tax refunds for the previous 4 years were high which they deemed as disposable income. Well I tried telling my attorney that we won't expect large refunds post filing because of second mortgage loan school loans etc. that were included in our Chapter 13 plan. So now we've paid into our plan a little over two years and our refunds for each year were $4K less. The trustee filed to dismiss and now my attorney says we should modify our plan. What the heck??? Why was this plan agreed to in the first place?? I'm wondering since they indicated we are $7k defaulted into our plan, do they end up adding it to our existing monthly payments?
How does that work?

[LadyInTheRed]

I'm wondering since they indicated we are $7k defaulted into our plan, do they end up adding it to our existing monthly payments?
How does that work?

I wish I knew. Your attorney should be able to answer this question. Once your attoney prepares a modified plan, make sure you review it and understand how he arrived at the new payment. If something doesn't seem right, speak up and don't back down unless the attorney can explain why he drafted the plan the way he did.

Why was this plan agreed to in the first place??

Good question. You signed the petition. You should have pushed the issue before you signed.
"trying to tell" your attoney is not good enough. I know that doesn't help you at this point. I am making the point for others who read this. You are your own best advocate. If your Chap 13 petition includes a plan payment based on past dmi that you can prove has decreasesed, you should insist your attorney revise it to reflect current reality. Only the means test should look to the past. Schedules I/J and your plan should look to the future. If an attorney doesn't know that, I suggest finding another attorney. If that isn't an option, than have the attorney read the Lanning decision. I'm not saying to ignore an attorney's advice if it makes sense, even if the payment may be higher than you'd like. But, you should at least understand why your payment is what it is.

[justbroke]

This does happen in Chapter 13s. The Trustee may not act on a single year's tax return, believing that it was not a significant increase but they may decide in a subsequent year that your DMI may be wrong. In many Districts, the Chapter 13 Standing Trustee requires the debtors to submit a copy of the tax return each year. (Some Districts actually require any tax refund to be submitted to the custody and control of the Trustee as well.) The Trustee's office should review the tax return to see if any significant changes in income or refund are present. I can't tell you what the threshold is, but my research shows that a > 10% change could prompt the Trustee to seek a Plan Modification.

It reads to me as though your refunds were to be turned over, or the Trustee's office simply was not looking closely enough at your tax returns. The only way I can see the Trustee using the word "defaulted" is if you failed to turn over disposable monthly income (DMI), such as the tax refund.

Work with your attorney. If the Trustee is just saying that your plan base should be increased by $7K, then you will need to account for that in your modified plan. If the Trustee is saying that you owe $7K in arrears and your DMI has increased and needs to be paid to the unsecured creditors, that is a little more complex.

As suggested, whenever you are hit with a Plan Modification, you should review your Means Test and Schedule I/J to see if your expenses changed and that those expenses would offset or eliminate any plan increase in some manner.

[LadyInTheRed]

It reads to me as though your refunds were to be turned over, or the Trustee's office simply was not looking closely enough at your tax returns. The only way I can see the Trustee using the word "defaulted" is if you failed to turn over disposable monthly income (DMI), such as the tax refund.

It reads to me like the refund was added to DMI when calculating the original plan payment and that the OP fell behind on the plan payment. If you are right, JB, I think the plan modification will be simpler.

[justbroke]

I hope it is simple and can be corrected without too much fuss. When I was in my Chapter 13, the biggest fear I had was for the Trustee to not only take my refunds, but also to want more DMI. Wait, that did happen! My plan payment went from over $5K to just over $7K after 20 months. That could certainly put someone in a questionable position.

I think you're right, LITR, and I had to re-read. If the average "high" refund was calculated by taking the average, dividing by 12, and then adding that to the gross monthly income, then it was covered. Perhaps there is something wrong in the Confirmed Plan or in the original DMI calculation.

Hopefully the (anticipated) average refund was actually lower than the refund actually received.

[kz2011]

The plan did call for us to turn over our tax returns each year in a lump sum. When calculating our tax returns over the past 4 years prior to filing we it was determined our tax returns averaged $7k. The trustee determined this is as DMI in addition to our plan payments of $600 per month.

[LadyInTheRed]

The plan did call for us to turn over our tax returns each year in a lump sum. When calculating our tax returns over the past 4 years prior to filing we it was determined our tax returns averaged $7k. The trustee determined this is as DMI in addition to our plan payments of $600 per month.

So, did you get any tax refunds at all? If so, did you turn the refunds over to the trustee? Have you made all of your plan payments? Were there minimum amounts that needed to be paid during your plan due to non-exempt assets or arrears on secured debt?

[kz2011]

So, did you get any tax refunds at all? If so, did you turn the refunds over to the trustee? Have you made all of your plan payments? Were there minimum amounts that needed to be paid during your plan due to non-exempt assets or arrears on secured debt?

We received a tax refund each year and have turned those amounts over to the trustee (it was less than what they expected). Our plan payments are $600 a month for 60 mo that includes back pay to our secured debt. We've made all those payment on-time each month thus far.

[chicagoed195]

It appears to me that the real issue is why did the refunds go from $7k to $3k. Was it a result of changes in the amount you had withhheld or was it because the the bankruptcy changed your itemized deductions significantly (like no longer paying interest on a 2nd mortgage).

If it was due to a change in withholding (monies that should have gone to the plan, but by reducing your withholding you received the funds as additional net income on each paycheck), then the trustee is right and you haven't performed in accordance with your plan. The consequences of that are modifying the plan to increase the monthly payment to cover the deficit, assuming that is feasible or modifying the plan to reflect the correct amount of DMI based on current circumstances.

A chapter 13 is both a journey and a destination. Lots of things can happen over a 60 month period to change an arbitrary number calculated at the time of filing. None of us were privy to the discussions and arguments that were made at the time your plan was filed and approved, so it really isn't our place to comment on the performance of your attorney. He might have done a great job in getting the plan approved or he might not have served you as well as he could have. Talk with your attorney, get on the same page, plan for the future and stop dwelling on what may or may not be the mistakes of the past.

[justbroke]

I agree. If the difference in tax overpayments paid to the Trustee, are different than what was scheduled on Schedule I/J and the Means Test, this could be the discrepancy. Just work with your attorney and perhaps you can figure it out. If you did, in fact, change your withholding in order to reduce the refund, for no other reason than to have a smaller refund, that could be what's causing the issue.

Please let us know what you discover. Hopefully it's something simple and manageable.