Tax Refund and Your Chapter 13 Michigan Bankruptcy

What happens to my tax refund in a Michigan Chapter 13 bankruptcy?

A Chapter 13 Bankruptcy involves a repayment plan that helps a debtor pay back some or all of their debt, on terms they can afford.  Any debt that is not paid by the end of the case is wiped out by the Chapter 13 Discharge. Keep in mind, I am talking about your Federal tax refund and not your State of Michigan tax refund. Federal tax refunds are considered disposable income in a Michigan Chapter 13 bankruptcy and are paid into your bankruptcy plan. Michigan tax refunds are not. You get to keep those without specific permission from the court.

Because a Chapter 13 Plan lasts between three and five years, a typical debtor will receive at least a few tax refunds during the case.  Generally, these tax refunds must be paid into the case for distribution to creditors.  However, there are several exceptions to this broad rule. You can modify your Chapter 13 plan to avoid paying your Federal tax refund to the Trustee.

100% payment to creditors avoid turnover.

First, if the debtor is paying back all of their debts, in full, through the Chapter 13 Plan, they will usually be permitted to keep their tax refunds.  The idea is that so long as all of the debts are being paid off, there is no reason to force debtors to give up their tax refunds and thereby pay extra.

Using tax refunds for unexpected needs.

Second, if the debtor has a problem come up that they need their refund money to deal with, the court may let them keep it.  For example, if the debtor’s furnace dies and they need to have it replaced, the court may allow them to keep their tax refund to pay for that expense.  If the debtor’s car needs repair, or they had higher than normal medical bills, or they need a down-payment for a new vehicle, the court may similarly let the debtor use their tax refund.  The court will not, generally, allow debtors to keep their tax refunds for normal expenses such as catching up missed mortgage or car payments, buying food and clothing, or paying property taxes.  Finally, it is important to understand that the court does not automatically let people keep their tax refunds for unusual expenses, the debtor must first file a motion seeking permission.

Bankruptcy and the IRS.

Finally, although the thought of giving up your tax refund probably leaves a bad taste in your mouth, finding out that you owe the IRS money in the middle of a Chapter 13 case is much worse.  Often, people planning to file Chapter 13 will reduce the amount withheld from their paycheck so that their tax refund will be smaller.  However, if they miscalculate and end up owing the IRS, they are often not able to pay, making their situation worse.

Chris McAvoy is a Michigan attorney who helps people with bankruptcy, family law, and estate planning. To find out more or set up an appointment, click here for contact info. Our attorneys help people in Taylor, Allen Park, Southgate, Lincoln Park, Riverview, Taylor,  Trenton, Flat Rock, Wyandotte, Brownstown, Belleville, Dearborn, Dearborn Heights, Westland, Garden City, Canton and the Downriver, Michigan area.

 

About Christopher McAvoy

I've been a lawyer since 1997 and I've seen a lot. We should talk. Not only do I have a lot of the answers, I will share them with you so you can make up your own mind. Chris McAvoy is a Taylor, Michigan attorney who helps people with bankruptcy, family law, and estate planning. To find out more or set up an appointment, click here for contact info. Our attorneys help people in Taylor, Allen Park, Southgate, Lincoln Park, Riverview, Trenton, Flat Rock, Wyandotte, Brownstown, Belleville, Dearborn, Dearborn Heights, and the Downriver, Michigan area.