Bankruptcy Chapter 13 and What Happens to Your Tax Refunds

This week has been one phone call after another from Chapter 13 debtors not being able to maintain their monthly obligations and wanting a quick resolution under the protection of the bankruptcy stay.
By: Bankruptcy Credit
June 22, 2010 - PRLog -- This week has been one phone call after another from Chapter 13 debtors not being able to maintain their monthly obligations and wanting a quick resolution under the protection of the bankruptcy stay. With the holidays behind us now, the neglect of monthly bills from December 2006 & January 2007 are beginning to surface. It is evident in the increased filings of Notice of Intent to dismiss and motion for relief. The average person would attempt to recover for the financial trauma of the holidays with an expected federal income tax return. Not the case with a debtor in active Chapter 13 bankruptcy case.

As many of our debtors have recently discovered, their income tax refunds will be processed and sent to their Chapter 13 trustee for review. Primarily, the Chapter 13 trustee will review the refund and if the is not IRS debt in the plan then they will release part or all of the refund. If the refund exceeds $2K then the Trustee will send $2K to the Debtor and keep the overage to file modification to allow plan base increase to absorb the remaining funds from the refund. However, I have seen in some cases that a Chapter 13 debtor would receive a $4K refund and the entire refund is released to the debtor. Each income tax refund is reviewed on case by case scenario. A person that has no dependents may only get part of the refund. Whereas a single mother with 3 or 4 dependents will receive a larger portion or all of the income tax refund. A Chapter 13 Debtor is at the mercy of the Chapter 13 Trustee when in comes to their federal income tax return.

People come in and file a chapter 13 to help get them back on their feet. At some point through the bankruptcy people find themselves in a hard spot. Some people fall behind on their trustee payments and receive a motion to dismiss their case. They now think that there is no hope and they give up. They then receive a call from their attorney’s office letting them know that they have options. When you receive a notice for dismissal for Trustee payments, you can go to the trustee’s office and sign an interlocutory order, also known as an IO. This is like a payment plan. The trustee will allow you to make your arrearage payments in six monthly installments. You have to be really careful when you do this though. You have to make sure that you make your regular monthly payment and the IO payment on time, or the trustee will dismiss you without any further notice to you or the attorney’s office.

Another option that you have is to modify your plan. This will only work if your case has been confirmed. If your case has been confirmed we would take whatever you are behind to the trustee and roll it back into your plan. This will cause your payments to increase because we added more to the plan and you have only “x” amount of months left to pay. There are attorney fees associated with this option and you should consult your attorney’s office to find out how much it costs and what their payment plan they have for those. You will also have to go under a wage order to have your payments deducted from your pay check. If you do not work and receive SS or disability there is a wage exemption form that you can fill out and you would make your payments to the trustee directly via money order or cashiers check.

At anytime that you become delinquent on your trustee payment, you should not give up hope. Contact your attorney’s office and let them know and find out what options you have available to you.

For more information visit or call us directly.

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