Can I Keep My Refund in a Chapter 13?
Tax refunds in a Chapter 13 are handle somewhat different than in a Chapter 7. We know, in a Chapter 7, as long as you received and spend your refund before filing, or are able to exempt your refund, then the trustee does not take it.
In a Chapter 13 if you have already received and spent your refund before filing, the trustee cannot take it. However, exemptions cannot be used in a Chapter 13 to protect an anticipated refund. The entire time you are in a Chapter 13 bankruptcy, between 36-60 months), any refund over $600, or 2x your plan payment amount (whichever is less) is to be turned over to the trustee.
If however, unanticipated expenses have occurred after the filing of the bankruptcy and you need to keep this money for a specific purpose we can file a Motion to Retain Tax Refund. In order to do this, you must provide your attorney with copies of bills, estimates, etc. showing the amounts you need to retain the refund for.
Acceptable uses of the tax refund are medical bills from AFTER filing, car repairs, unexpected home repairs, and so on. It cannot be kept to pay things that are already allotted in your budget like utilities, rent, or even getting caught up on your Ch 13 plan payments. All of these expenses are already accounted for in your budget and therefore the trustee will not allow you to retain additional money to pay these creditors.
Once you have provided your attorney with this document, we file the motion and then wait 21 days to see if the trustee objections. If not objections are filed, then an order is submitted to the court. Once granted, you can spend the tax refund on the approved expenses. If however, an objection is filed, your attorney can work with you to correct the issues. If the issues are not resolved and the order is not granted, you must turn the tax refund over to the trustee.
So let’s say you do not have any additional expenses and do not need the refund. What happens to it once you send it in to the trustee? Does the trustee get to keep it? No. The money is spread out proportionally to all of your unsecured creditors.