Chapter 13 bankruptcy and tax refunds can be a tricky issue in Georgia. I recently received a call from a Dallas GA bankruptcy client who is near the end of his case but has never paid any of his tax refunds to the Chapter 13 Trustee as required by his specific plan.
In Chapter 13 bankruptcy cases where a client receives Earned Income Credit, we can keep all of the tax refund that can be attributed to the credit.
In Chapter 13 bankruptcy cases where the client is paying less than 100 percent to the unsecured creditors, any tax refund received by the bankruptcy client during the applicable commitment period that can’t be attributed to the Earned Income Credit must be paid the Trustee.
The Dallas GA Chapter 13 bankruptcy client who has not paid his tax refunds to the Chapter 13 trustee as required by his plan has three choices. First, he can let the Chapter 13 trustee dismiss the case. As a general rule, allowing your Chapter 13 bankruptcy to be dismissed is a bad idea.
A second choice is to figure out how money the trustee should have received and then adjust the unsecured pool of the Chapter 13 plan. For example, lets say this Dallas GA bankruptcy client received $5000 in a tax refund over the life of his case. As his case nears toward the end, the Chapter 13 Trustee conducts an audit of the case and discovers that none of the tax refunds were ever paid into the case. If the Dallas GA bankruptcy client’s Chapter 13 plan is amended to change the unsecured pool to $5000 from zero, this means that the client will be paying an extra $5000 into his case. As a result, the unsecured creditors will receive the same amount of money they otherwise would have if the tax refunds had been mailed to the Chapter 13 Trustee’s office.
A third option is that his bankruptcy attorney can file a motion with court to excuse the nonpayment. Saying that the money was spent on a nice vacation won’t fly in a court of law. In contrast, if the money was spent to repair a leaking roof, I am confident that something like this would be approved by the court.
This entire mess can most easily be avoided by paying your tax refund to the bankruptcy Trustee if your plan requires you to do it.