How To Keep More Of Your Tax Refund In Chapter 13 Bankruptcy

If you file Chapter 13 bankruptcy, you pay off your debt gradually in three to five years under a payment plan devised by the court. Though you don't lose assets under Chapter 13, any extra income you are expected to get counts as disposable income, or income remaining after you pay needed expenses, including tax refunds. 

The trustee will count it as part of the bankruptcy plan, and expect you to turn it over. Here are ways to keep more of your tax refund under Chapter 13 bankruptcy.

Adjust Employment Withholding Tax

Check the withholding tax on your tax returns. Sometimes, the amount of withholding tax is greater than it should be, which leads to bigger refunds. Reduce the amount to the necessary withholding tax, which means the trustee could abandon the refund since the smaller amount would not benefit your payment plan. You put more money in your pocket, and less money goes to the trustee.

Time the Filing and Spend Wisely

Spend the refund on needed things to reduce your disposable income. However, only spend your refund on necessary items such as rent, food, medical bills, educational expenses, or home repairs. If you spend the money on unneeded items, your trustee will still request that you turn it over to them, though you have already spent the money.

You will also need to time the filing right. If you file between August and December, expect the trustee to ask for a copy of this same return to check for refunds you could get. 

Claim a Hardship

If you experience a hardship such as a medical emergency, you could request a hardship discharge. A hardship discharge is granted by courts when you can't make payments due to an emergency beyond your control, and modification isn't an option. You will need to provide the court with evidence that it is a true emergency. 

Know These Exceptions

One reason trustees look for disposable income is creditors don't expect you to pay the full amount you owe them in bankruptcy. A trustee has no reason to seize your refund, if your repayment plan pays 100% of debts. If your plan does not pay 100% of your debt, the refund counts as additional income, and it does not lower payments. Your state may exempt portions of your tax refund classified as Earned Income Credit or Additional Child Tax Credit.

You should be able to keep all of a portion of your tax refund under Chapter 13 bankruptcy with planning. If you don't have a bankruptcy lawyer, consider hiring one (such as one from A bankruptcy lawyer will know more about these issues, and they can advise you on how to keep more of your refund.