Tax refunds and chapter 13

[ROGER1961]

When we first filed for bankruptcy our lawyer told us we could keep our tax refunds. How does that work?

[lightning65]

I am in chapter 13 in Michigan and was told the same thing by my lawyer. I just had my case confirmed about a week ago and I am not able to keep my tax refund. I had found this out about a month ago and talked to my lawyer again who said there was nothing we could do about it and the only to keep some of it was for extreme circumstances, e.g unforeseen medical bill. I do have a spouse who did not file with me but that did not matter.

[justbroke]

When we first filed for bankruptcy our lawyer told us we could keep our tax refunds. How does that work?

It REALLY depends on a.) what district you filed, and b.) whether any previous tax refund was properly calculated into your income.

Most good Chapter 13 bankruptcy attorneys will factor an average of your prior refunds (if you get them every year), back into your income. For example, you earn $100K a year, have $30K withheld, but get back $10K in taxes each year. When your income is calculated, your income would have been $100K - $30K = $70K (net pay). However, you get back $10K, so your real net income (net pay) is $70K + $10K = $80K. The attorney uses the $80K rather than the $70K because the $80K is truly reflective of your income.

What happens is that many Chapter 13s are not calculated that way, so any refund is actually excess income that was not reported. Trustees feel that if you didn't need it all year, then you just don't need it anyhow... and will want the entire amount. In some districts this calculation (that I used where you include the average refund back into the income) will be used to exclude a certain amount from any refund.

Some Chapter 13 Plans may actually read that any refund "exceeding $X,XXXX" is to be surrendered to the Trustee for administration.

Again, this is a function of the District, Trustee, and how your attorney works.