What happens to your tax refund after Chapter 13 bankruptcy?

Chapter 13 bankruptcy is a debt-repayment plan that lasts approximately two to five years. This type of bankruptcy requires the debtor to repay creditors with disposable income. However, tax returns can be considered a form of disposable income, and this might require the debtor to give up the entire amount of the refund toward debt repayment for the first three years of the Chapter 13 plan. On the other hand, there are situations where you may avoid losing part of this tax refund.

You can generally keep all of your refund if you have enough money to cover all of your debt. In other words, if your monthly income is enough to complete your repayment plan within three, four or five years, you could be permitted to keep your entire tax return.

However, the trustee and bankruptcy court will take a portion of your return if you do not have enough time during the bankruptcy repayment period to pay off all of the listed debts. In these cases, a portion or all of the refund is sent to the trustee and applied to the debts.

Nevertheless, there are strategic ways to actively protect your tax refund. For example, decreasing your withholding from your paycheck can help ensure that you do not get a hefty tax return. Such a plan will put more of your income in your hand up front.

If you want to avoid a large tax refund, you might take advantage of your company's 401(k) retirement plan, which deducts a percentage of your pretax pay and sets it aside into a fund. A bankruptcy plan cannot seize the retirement account. This strategy helps reduce the amount of a tax refund and creates a benefit for the future.

Other considerations

Ultimately, there are many ways to deal with your tax return. It is important to make sure that your strategy is in accordance with the law and your Chapter 13 bankruptcy plan. If you do not submit the tax returns and any other payments required under your repayment plan to your trustee, you could compromise your Chapter 13 bankruptcy.

If you receive a tax refund each year, you may want to secure the help of a qualified bankruptcy attorney before finalizing your plan. Once your bankruptcy repayment plan is structured, it is extremely difficult to make any changes. A bankruptcy lawyer can help create a repayment plan that works for your needs.