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Can You Keep a Tax Refund After Filing For Chapter 13 Bankruptcy?

tax refund


By:Mike Cibik



Can You Keep a Tax Refund After Filing For Chapter 13 Bankruptcy?

When you receive money during financial troubles, it is a relief, and it doesn’t matter where it comes from. Wouldn’t it be great to get a tax refund while you have filed for chapter 13 bankruptcy? Is it even possible? As per the law, any payment that you avail during Chapter 13 Bankruptcy has to be passed on to your creditors.

To be able to protect the tax refund, let’s dig a little deeper and find out more about bankruptcy, tax refunds, and of course, the laws.


All about bankruptcy

It is a fact that not many are aware of bankruptcy basics. For a layman, the term ‘bankrupt’ means one is stripped off all his belongings and properties and that he lands on the street. Thankfully, this is not true, as a person can lead a dignified life even during the process as long as he agrees to pay off the debt. That is why there are different chapters. For individuals, there are four; which are Chapter 7, 11, 12 and 13.

Among these, Chapter 13 is the most commonly filed one. It is more about managing the debt in such a way that it can be paid off in a period of time, via installments.


Tax refund and Chapter 13

When you file for Chapter 13, your creditors cannot initiate any forceful recovery of the debt. At the same time, you will be granted a certain amount of time to pay off the debt according to a plan. A court-appointed trustee will oversee your payment plan.

Chapter 13 requires you to part with all of your disposable money which then becomes the repayment amount in the plan. Disposable income is the amount that you are left with after paying off your necessary expenses.

The tax refund is regarded as disposable income by the court. There are ways in which you can apply provisions in Chapter 13 so as to be able to keep some or the entire amount that you receive as a tax refund. Talk to a bankruptcy attorney and discuss what your possibilities are.

Every bankruptcy filing is different, and your attorney can advise you of various ways in which you could retain your tax refund.


The first is to change your repayment plan. For this, you need to approach the court and apply for a modification to your plan.  This application has to be submitted every year whenever you receive tax refunds you wish to divert. Your application should state the tax refund details, the amount and also the reason you need the money.

It is important to give a valid reason because the court won’t allow the money to be used for any of your daily expenses. This is because when you agreed on accepting Chapter 13 plan, you have also agreed that you are in a position to foot your daily expenses. If not, then you will no longer be considered to be eligible for the plan.

The grounds on which you can request to excuse the tax refund are repairs for any of your appliance or your car or any sudden medical expenses for your family or self. You can also cite your down payment for a new vehicle but only as a replacement for your old one. At the same time, you need to prove that your old car is beyond repair. If it can be repaired, then you can use your tax refund for the purpose. Funeral expenses are also accepted as a valid reason to retain your tax refund.


The second method is to incorporate that you will not be in a position to include your tax refunds in the plan from the start. Even in this case, you will need a strong reason. You can include the amount as a part of income and expenses. But again, this may not be accepted as a valid reason because the court may not accept your tax refunds as your income.

There are also those who agree to pay the entire debt without considering the tax refund. In that case, the court does not lay strict provisions and allows you to keep the refund.

Another way is to let the refund you have received to be accepted as the tax for the next year. This can be done, and you can continue to do so till you pay off the debt and are out of bankruptcy.


Contact Cibik & Cataldo at 215-735-1060 to speak with one of our experienced attorneys and to find out how you can keep your tax refund dollars to yourself.


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