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Myths and Truths About Chapter 13 Bankruptcy: Part II


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5/4/2012
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Myths and Truths About Chapter 13 Bankruptcy: Part II
Myth:  Debtors who file a Chapter 13 bankruptcy will lose their entire tax refund every year they are in the Chapter 13 without exception.
Truth:  Sometimes debtors in a Chapter 13 bankruptcy are required to turn over their tax refunds.  The debtor is obligated to turn over tax refunds; however, the debtor may retain the lesser amount of either $600 or two months plan payments.  The debtor is required to turn the excess over to the trustee and should not spend the rest of the refund.  If the debtor would like to retain more than that amount, they can contact their attorney and have their attorney file a Motion to Retain Tax Refunds.  The motion states the legitimate expenses debtor would like to spend the money on, and receipts or bids for the services or products would be attached so the trustee can confirm the amounts the debtor wishes to retain.  The trustee has 21 days to object.  If no objection is filed, the debtor can retain the portion of their refund accounted for by the motion.  If the trustee objects, the debtor would be required to surrender their tax refund to the trustee. 
Myth:  When the debtor makes his or her Chapter 13 plan payment every month, the trustee takes most of the money for himself.
Truth:  The trustee gets paid a small percentage of the total plan base as his fee.  The percentage rate fluctuates but is usually about five percent.  The trustee disperses the rest of the monthly plan payments to various creditors.  The trustee pays on secured debts, such as vehicle loans, arrears on houses, and monthly mortgage payments if the debtor wishes.  They also pay taxes, unsecured debts, sewer bills, and other debts as well.  If the debtor is required to surrender tax refunds or employee bonuses, the trustee does not keep that money for himself.  He generally uses those proceeds to pay unsecured creditors a portion of their debt if they have filed a proof of claim.  The trustee may pay certain creditors before other creditors based on their priority level.
If you have questions, please contact a St. Louis or St. Charles bankruptcy attorney.


Category: Bankruptcy


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