Are Future Tax Refunds Required to Be Turned Over in a Chapter 13 Case in the Western District of Kentucky?

A debtor filed a Chapter 13 bankruptcy in the Western District of Kentucky.  A year later the debtor filed her tax returns and received a combined Federal and Kentucky tax refund in the amount of $1,563.00. The debtor spent the money to catch up on household bills.  Later, the Trustee filed a Motion to Dismiss her case because she didn’t turn over her tax refunds.  What happened? Under our local Rule 13, all Chapter 13 debtors who are paying their unsecured creditors less than 100%, must turn over copies of their tax returns, tax refunds and an updated budget.  The theory behind this local rule is that when a debtor files a Chapter 13 case, she is agreeing to repay her debts to creditors to the extent that there is income available to pay them.  The debtor is in control of the income and is responsible to pay the defined plan payment to the trustee each month.  Once a bankruptcy is filed, an estate is automatically created and consists of property of the debtor, including all income or earnings earned after the case is filed up to the point in time that the case is discharged, dismissed, or converted.  Since it can be argued that tax refunds are considered future income, the judges in the Western District of Kentucky created a local rule that requires this turnover of refunds to the trustee.  Interestingly, the judges in the Southern District of Kentucky and the Eastern District of Kentucky do not express the same views and do not require this annual turnover of tax refunds probably because they consider a tax refund not to be “income” but to be an overpayment to the IRS for taxes that were withheld from the debtor’s paycheck.

Question: What is the difference between a Chapter 7 bankruptcy and a Chapter 13 bankruptcy?

When you elect to file for Chapter 7 Relief, you seek to have most if not all of your debts eliminated or discharged. However, in order to receive the discharge, you must be prepared to allow a bankruptcy trustee the right to sell any of your non exempt property for the purpose of turning over the sales proceeds to your creditors. Your bankruptcy attorney will be able to determine and advise you as to whether your assets are exempt and protected from sale by your trustee.

If you don’t want to lose your nonexempt property, you may want to consider filing a Chapter 13 which is a repayment plan that proposes to pay back some, but not necessarily all of your debt including your credit cards and medical bills. The amount you have to pay back depends on the amount and type of debt that you have, how much property you have, and how much money you make.

If you are looking for a way to save your home from foreclosure, then filing a Chapter 13 Bankruptcy may be the solution. You can immediately stop the foreclosure process by filing a Chapter 13 Plan that allows you to cure your home mortgage arrearages over five years.

Are All Unsecured Credit Card Debts Collectible in a Chapter 13 if the Claim is Timely Filed?

Facts: A debtor in the Western District of Kentucky files a Chapter 13 case in November 2008. An unsecured creditor, XYZ, files a claim in the case for approximately $10,000.00 with supporting documents showing that the debt was last paid by the debtor in 1990 and XYZ had never taken legal action to pursue collection of the debt.  Debtor objected to XYZ’s claim on the basis that the debt was not collectible under Kentucky state law because the statute of limitations had run.

Analysis of the law: When a debtor files bankruptcy, federal law governs the case.  State law can also be intertwined in federal bankruptcy cases.  With regard to the collectability of debts, if a creditor cannot pursue a collection action in state court, then the creditor is barred from pursuing collection in the bankruptcy court.  The creditor does not get a second bite at the apple if the debt cannot be pursued in state court in lieu of the debtor filing for bankruptcy.  The disallowance of the claim is not automatic; the debtor must raise the objection to the claim or it may otherwise be allowed and paid along with other unsecured creditors in a Chapter 13 case.

Outcome: XYZ’s claim was disallowed and the claim was withdrawn.  Here the debtor made the last payment on the account in 1991 and XYZ never filed a lawsuit for the debt owed.  The debtor filed 17 years later.  Kentucky law requires a creditor who is owed repayment on a debt incurred under a credit card arrangement by a debtor to bring legal action within 15 years.  KRS 413.090.