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.
