Will I Lose My Tax Refund by Filing Chapter 13 Bankruptcy?

A Chapter 13 bankruptcy is a repayment plan that lasts three to five years.  During that time the debtor is required to devote all disposable income to the repayment of debt.  Most bankruptcy trustees and courts consider tax refunds part of the debtor’s disposable income that is over-withheld and should be paid into the Chapter 13 plan.  However, instead of reducing the amount payable under the debtor’s plan, tax refund money is paid to unsecured creditors that would otherwise not be paid.  If the debtor is paying a 100% repayment plan, the trustee will not request turnover of any tax refunds.

Some courts have approved a provision in the Chapter 13 plan that requires the Internal Revenue Service to forward any tax refund to the trustee’s office.  However, at least one bankruptcy court has found this practice to be unlawful.  In United States v. Carroll, No. 2:09-cv-13505 (E.D.Mich. Jan. 20, 2010), the bankruptcy court concluded that the IRS was not a party to the debtor’s chapter 13 case and did not have an opportunity to object to the plan.  Additionally, as a part of the United States government the IRS possesses sovereign immunity that it did not waive. 

Keeping your money and avoiding an income tax turnover may be as simple as adjusting your paycheck withholding.  By speaking to a tax professional you may be able to predict your tax liability and put more money in your pocket each payday.  However, be careful to avoid a situation where you do not withhold enough taxes and end up with a large tax bill at the end of the year. 

If your tax refund is largely due to an Earned Income Tax Credit (EITC), the IRS allows tax payers to request an advance payment of the EITC.  Information regarding this advance payment program can be found on the IRS website.   If you qualify, your employer will add additional money to your take-home pay each paycheck. 

If you want to avoiding surprises during your Chapter 13 bankruptcy, seek out and hire an experienced bankruptcy attorney.  An experienced bankruptcy attorney can discuss your financial situation with you and help you keep your hard-earned money for your family.

How Taking Financial Actions Without Court Approval May Affect Your Chapter 13 Case

Before people file for bankruptcy they are free to handle their finances as they see fit.  You can choose which debts to pay when you want or opt not to pay at all.  In addition, you can apply for credit to purchase things, like a car or furniture or a home, and open up new credit card accounts.

After you file for bankruptcy all of this changes.  In essence, the court becomes your financial overseer.  Any financial move you make besides paying your debts as designated through the Chapter 13 plan and paying for your regular living expenses will require court approval. 

So what does this include? Any loan, even something as small as taking out a 401k loan through your employer, will require court approval.  The idea behind this is that the court wants to make sure that you are not putting yourself in a worse financial position than you were in before you filed the bankruptcy. 

What happens if you do take a loan without court approval?  First, a new loan reduces money that is already earmarked to take care of the things in your budget, like food, clothing, shelter, insurance, which may cause a monthly financial shortfall.  Secondly, if you need to request a reduction of your monthly plan payment to the court because of a decrease in income, then the court is likely to deny your request because of the loan you have taken out without prior approval.  Thirdly, the court may even dismiss your case.

As you can see, this can be detrimental to your case.  Be mindful of this as you embark on a Chapter 13 case filing.

Motion/Order to Raise Plan Percentage filed by your Trustee

Our office receives calls from clients in a panic from time to time when they receive one of these Motions and Orders. And understandably so.  Your initial reaction is “I can’t raise my plan payment.  I am already stretched to the limit.” Relax, your plan payment is not being raised.  What is being raised is the percentage of debt being repaid to your creditors who filed a claim to be paid in your Chapter 13 Plan.

This is purely an administrative matter by the Trustee.  Your creditors have a deadline to file a claim to be paid in your bankruptcy.  After the deadline, the Trustee reviews your case and pays only those creditors who actually filed a claim.  The plan as originally filed may have stated that the intention was to pay the unsecured creditors approximately 10% of the balance owed at the time of filing of the case.  However, after all the creditors that filed claims are determined, it appears that your regular payment will end up paying these creditors 25% of what is owed by the end of your plan. For bookkeeping reasons, the Trustee will file a Motion and Proposed Order which raises the percentage paid to unsecured creditors to 25%.  It is a simple matter and does not affect the amount of your payment.

Creditors who do not file a claim and were notified of the bankruptcy are not paid within the bankruptcy and will be discharged at the end of the plan even though they received no money. They have given up their right to collect the debt and cannot later make you pay them because they did not get paid in the bankruptcy.

Help! My Car Has Been Repossessed!

Imagine this: you are behind on your car payments.  Heck, you are behind on a lot of bills, and perhaps you have been considering bankruptcy for some time.  Then one day you walk out the door for work and discover. . . 

Your car has been repossessed! 

Don’t despair!  Bankruptcy can still help.  Call an experienced bankruptcy attorney immediately because you may be able to get your vehicle returned to you. 

The law in most areas (including the Sixth, Seventh, Eighth, Ninth, and Tenth Circuits) is when a debtor files a Chapter 13 bankruptcy, the creditor must immediately return a repossessed vehicle to the debtor.  This is because even though the creditor has taken possession of your vehicle, you are still the legal owner.  The Bankruptcy Code states that in a Chapter 13, a creditor in possession of a debtor’s asset must ordinarily relinquish the asset back to the debtor. 

However, this begs the question: what if your car is sold at auction or the creditor transfers the vehicle title out of your name?  If this transfer is done after the Chapter 13 bankruptcy is filed, it is typically a violation of the automatic stay and the vehicle will be returned.  If the transfer is done before the Chapter 13 bankruptcy is filed, you are out of luck.  You no longer have ownership of the vehicle. 

If the creditor refuses to return the vehicle, or does not return the vehicle in a timely manner, most courts will sanction the creditor.  Once your vehicle is returned you must provide “adequate protection” to the creditor to assure that the property will be safeguarded and that the creditor will be adequately compensated.  This usually takes place by submitting a Chapter 13 plan of repayment to the bankruptcy court. 

If your vehicle has been repossessed, take immediate action!  Call an experienced bankruptcy attorney and discuss your options.  Your attorney can help you make the right financial choice for yourself and your family.

Discharging Post-Petition Debt in Chapter 13

A lot can happen during a Chapter 13 repayment plan which generally lasts three to five years.  Sometimes large debts are incurred that the debtor is unable to pay.  Fortunately, a Chapter 13 debtor is able to discharge a post-petition debt, but only after certain prerequisites are met. 

First, the debtor must amend the repayment plan to provide for a post-petition debt.  Second, the debtor must usually obtain the approval of the bankruptcy trustee prior to incurring the debt.  This is not always obtainable, especially in the case of a large medical bill.  Third, the creditor must voluntarily choose to file a proof of claim.  And finally, the claim must either be a tax claim, or a claim for a consumer debt necessary for the completion of the debtor’s plan. 

A common situation in which post-petition debts arise in a Chapter 13 case is where the debtor needs to purchase a different automobile.  Repaying a post-petition car loan through a Chapter 13 plan is easily accomplished through coordination and cooperation from the trustee, the lender, and the court.  The lender agrees to be paid by the trustee, the trustee agrees to sanction the debt, and the court approves the amended plan allowing the lender to be paid through the bankruptcy plan. 

 In some cases it may not be practical to include a post-petition debt in the debtor’s Chapter 13 plan.  In that case, the debtor may elect to convert the Chapter 13 case to one under Chapter 7.  The Bankruptcy Code states that a debt that arises after the Chapter 13 filing date, but before the debtor’s conversion to Chapter 7, is to be treated as a pre-petition debt.  The Chapter 13 restrictions and requirements listed in the preceding paragraph do not apply to debts in a conversion case.  

The Bankruptcy Code contains many flexible options for reorganizing your finances and dealing with your creditors.  Even when there is an unexpected event that results in a debt, your bankruptcy attorney can provide you with choices for dealing with a post-petition debt.