The purpose of this blog post is to explain what a Chapter 13 trustee will do with your tax refund money after you send it them. I imagine that some you reading this blog might be screaming to yourself, “What! I have to send my tax refund to the Chapter 13 Trustee!” Not every filer has to send in their tax refunds. To read more on this topic, please click here.
If you mail your tax refund to the trustee, where does all of the money go?
The answer to this question is the same as the answer to almost every legal question. It depends.
First, you must know if you are over median income. If your family earns more money than an average family of your size, then your are over median. Your bankruptcy attorney can give you exact numbers for your specific case.
Second, you need to understand the difference between unsecured debt and secured debt. Unsecured debt are things like credit cards and medical bills. There is no property that is attached to unsecured debt.
In contrast, secured debt is things like your car or your house. With this type of debt, there is property attached to it. If you don’t pay for your house, they take it. Same thing for cars.
The next step is that we need to know the applicable commitment period for your case.
If your family earns less than an average family of your size, then the applicable commitment period for your case is 36 months. This means that in order for you to complete your Chapter 13 bankruptcy, your case must last for a minimum of 36 months.
Almost every case will last for more than 36 months. The reason is that even if you are eliminating all of your unsecured debt, we may want to stretch out the time that we are paying the secured debt to get your payment down to the lowest amount that we can.
If you have a case that is set up to last for 54 months but the applicable commitment period is 36 months, then your tax refund paid to the trustee will reduce the length of your case.
If your family earns more money than the average family of your size, your Chapter 13 bankruptcy case must last for a minimum of 60 months.
In the applicable commitment period is 60 months but if your plan is a 100 percent plan, then paying your tax refund to the trustee will reduce the length of your case.
However, if the applicable commitment is 60 months and your case is a composition case (meaning that the unsecured debt is being eliminated), then every time you pay your tax refund to the trustee, the money will be applied toward the unsecured debt that is being wiped out. The length of your case will not be reduced.
Tax refunds and bankruptcy are a complicated issue. Don’t make any assumptions based on what read on the internet. Every case is different. Some cases have exceptions. To know for sure how the law applies to your case, you must meet with a bankruptcy attorney.