Kentucky Bankruptcy Law

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What happens to my tax refund in a Chapter 13?

A couple days ago I addressed an issue that can arise over large tax refunds in a Chapter 7. It will help you understand this post if you go back and read that one. In a Chapter 13, instead of a large tax refund threatening to knock your out of a Chapter 7, the threat is to your plan payment. In Kentucky and many other districts, the Chapter 13 plan payment is determined by your Schedule I income minus your Schedule J expenses. The trustee in the Chapter 13 examines your income to make sure it is accurate and scrutinizes your expenses to make sure they are reasonable.

Part of this analysis of expenses includes a look at your tax refund. If you have a sizable tax refund (some say over $1,200.00), then the trustee may demand that your pay the excess into the plan. So, if you receive around $6,000.00 total in refunds each year, then the trustee will argue that you can pay about $500.00 more per month into your plan.

If you have a sizable refund for this past tax year but you have reason to show that it will not be like that going forward, then be sure to make that argument. Changes is deductible expenses or number of dependents can help show that last years refund was a fluke. However, you will want to make sure that the number of exemptions you claim through your employer is correct so that you have only a small refund next year. If you have a large refund again, the trustee will demand and increase in your plan payments.

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April 12, 2013 - Posted by | Bankruptcy, Chapter 13, Plan, Plan payments | , , , , , , , ,

1 Comment »

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