How Chapter 13 Works
A Chapter 13 bankruptcy involves paying off all or part of your debts over three to five years rather than risk having your property liquidated by the trustee to satisfy your creditors. After you file for Chapter 13 protection, you must submit a plan to the court, showing how much income you propose to give the trustee to pay down your debts and how much your creditors will receive. Chapter 13 plans can vary according to your income and how much you’re able to give the trustee – they’re not one-size-fits-all. At the end of three or five years, your unsecured creditors may receive all of what you owe or they may receive only a percentage of the debts, depending on how much of your income you’ve been able to devote to the repayment plan.
You must have a regular source of income to qualify for Chapter 13, and it must be sufficient to pay all your regular monthly living expenses with something left over to fund your bankruptcy plan. The leftover portion is called your disposable income. Because your plan already accounts for your living expenses – you’ll pay them before you give the trustee the balance of your income – the law presumes that you don’t need your tax refunds to pay your regular monthly bills. Therefore, while you’re in Chapter 13, your refunds represent projected disposable income. This is extra money and when you’re in bankruptcy, you don’t get to use that money however you like. Typically it must go to the trustee, who then gives the money to your creditors.
Modification of the Plan
Although you should probably plan to give your refunds to the trustee, you may have a few options to avoid doing so. If something unforeseen happens after you file for bankruptcy and you’re facing a cash emergency, you can petition the bankruptcy court to modify your plan and remove the refund from the proceedings. For example, if you have a medical emergency and provide proof of the unexpected expenses and proof that you paid them out of your non-disposable income, the court may adjust your plan to allow you to keep the tax refund so you can catch up with your regular bills.
You can also try to keep your refund by including a provision to that effect in the repayment plan you submit to the court at the beginning of your bankruptcy. The court and your creditors will want a pretty good reason for this. If you need the money to make ends meet, they may take the position that you should have filed for Chapter 7 instead because you don’t have the necessary income to fund a Chapter 13 repayment plan. Ultimately, it may come down to the discretion of the judge assigned to your case. Even if the judge approves your plan with such a provision, you may not be able to keep all your refunds, but only the first $2,000 of each; the rest would go to your creditors.
If your Chapter 13 plan is such that it will pay off 100 percent of your unsecured debts, there’s no reason for the trustee to take your refunds – he’s not going to give your creditors more money than what you owe them. If you file a joint married return with your spouse so some of the money is rightfully hers, and if she’s not a petitioner under your Chapter 13 plan because you filed for bankruptcy alone, the court will allow her to keep her portion of the refund.
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