Chicago Bankruptcy Question: Will I lose my income tax refunds if I file for Chapter 13?

Chicago Bankruptcy Question of the Day: Will I lose my income tax refunds if I file for Chapter 13?  In the Chicago area, the answer to this question depends on the structure of your Chapter 13 plan of reorganization and which Chapter 13 trustee you are assigned to.  

One of the requirements of confirming (approving) a Chapter 13 plan of reorganization is the court's determination that the filer(s) is contributing all projected disposable income to the plan for the entire term of the plan.  In the Chicago area, the courts have consistently held that income tax refunds are to be included in the calculation of projected disposable income.  Therefore, as a general rule, income tax refunds have to be paid to the Chapter 13 trustee as additional payments, which will then be disbursed to your creditors in the order and manner provided for in the plan.  There are, of course, exceptions to this rule.

First and foremost, if your Chapter 13 plan of reorganization already calls for full repayment of all of your creditors, then the trustee will not request that income tax refunds be paid into the plan.  Some filers do elect to do so voluntarily, as doing so will reduce the amount of time that you are in the plan by paying it off earlier than projected. Second, two of the three Chapter 13 trustees in the Northern District of Illinois, Eastern Division, which covers Cook and the collar counties, allow filers to keep the first $1,200 of their income tax refunds.  These are the offices of Tom Vaughn and Glenn Stearns.  Any refund above $1,200 is required to be paid to the Trustee as an additional payment.  Only the office of Marilyn O. Marshall requires contribution of the entire tax refund.  Third, if there are immediate and necessary expenses that can only be paid with your income tax refund, your bankruptcy attorney may be able to file a motion to get an exception to this requirement for a given year.  In order to be successful in this, you will need to provide specific documentation supporting the expenses to the attorney and the expenses must be reasonable and necessary in the eyes of the court.

It is normally recommended that, upon filing for Chapter 13 in Chicago, you contact your payroll department and adjust your deductions so that you do not receive a significant income tax refund.  Instead, you have smaller tax deductions taken and more take home income from each paycheck.  This will make your budgeting easier, limit your Chapter 13 plan to only the fixed monthly payments proposed and keep you from giving the federal government an interest free loan until they return the funds in the following year. 

If you are considering filing for Chapter 13 bankruptcy protection and normally receive a significant income tax refund, you want the advice of an experienced Chicago bankruptcy attorney before you file your case and throughout your Chapter 13.  A skilled bankruptcy attorney will properly advise you on how to minimize the loss of your income tax refunds while still acting in good faith in filing your Chapter 13.  The experienced bankruptcy attorneys at Ledford & Wu are happy to offer a free consultation to discuss your options and assist you in properly planning for a Chapter 13 bankruptcy filing.

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