Tax Refunds, Bonuses and Insurance Proceeds

Spring is the time of the year where we receive a lot of contact from clients wanting to keep a tax refund that they are expecting to receive as they are filing tax returns. Throughout the year we also receive requests from clients to keep bonuses received, insurance proceeds and any other sums of money that have been received.

Typically any additional income received during a Chapter 13 is additional money to be paid toward the plan to pay unsecured creditors. However, if there is a reason for money to be kept the Debtor may have that option. Whether the Debtor can keep the money or a portion of the money depends on several things.

First to consider is that type of expense the Debtor needs to funds for. Is this something that was already listed to be paid as a normal part of the Debtors budget? If so, then the trustee will argue that those expenses are already accounted for and likely will not allow the money to be retained. However, if the expense is something not already accounted for or was something that was higher than what was accounted for, then the trustee may allow the funds to be retained.

Second to consider is whether the Debtor can and has provided documentation regarding the expenses. Documentation can be estimates for work that needs to be done, bills that are post-petition and not already included in the monthly budget or even receipts where there was an urgency and the funds has to be spent and now the Debtor is asking after the fact to retain the funds. While the latter is not ideal, there are certain circumstances where the trustee will allow a motion ratify funds that have already been spent.

Third to consider in whether the Trustee will allow funds to be retained is whether the Debtors are complying with the guidelines of the Chapter 13 as a whole. For example, have they provided all requested documents to the trustee? Are they current on Chapter 13 plan payments? If the Debtor is behind on plan payments the trustee will not allow the Debtor to retain funds for any other purpose. A Chapter 13 plan cannot be successful without continuous timely payments to the trustee and therefore without showing proof that this is being done, funds will not be allowed to be retained by the Debtor.