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Income Tax Refunds in Bankruptcy-Chapter 13

If you’re filing an “adjustment of debts” Chapter 13 case, what choices do you have about your income tax refund?


Start with What Happens with Refunds in Chapter 7

To understand how tax refunds are treated under Chapter 13, it helps to compare how they are treated under Chapter 7.  For more details about that, see my last blog. But to summarize, when you file a Chapter 7 bankruptcy usually you can keep your tax refund either by 1) smart timing of the bankruptcy filing, or 2) by the use of “exemptions.” If you wait to file your case until after you have received and appropriately spent the refund (carefully following the advice of your attorney on where to spend it), then this refund is not an “asset of your bankruptcy estate”—the bankruptcy trustee and your creditors have no claim on it. On the other hand, if the refund IS an “asset of your bankruptcy estate” but it is covered by an “exemption,” then the refund is protected and you get to keep it.

The Good News about Tax Refunds under Chapter 13

  • As with Chapter 7, if you are flexible about when to file your case, wait until you have received and spent the refund appropriately.
  • Better than Chapter 7, if you have to file your Chapter 13 case when your tax refund is still pending, you may be able to get permission to spend that refund—or part of it—for some urgent and necessary expense, instead of having it just go to pay creditors.
  • Also better than Chapter 7, to the extent that you are required to pay all or part of the refund to the trustee, you would likely have some discretion about where that money would get paid, by including that in the terms of your Chapter 13 plan.  

But This Comes with Some Not So Good News 

  • Chapter 7 focuses only on assets you own or have a right to when the case is filed. So it involves only the tax refunds that are pending at that point in time. Chapter 13 in contrast involves your income throughout the three to five years that your case is active. Since future tax refunds are considered part of your ongoing income, they need to be accounted for, and generally must be paid to the trustee to pay to your creditors.

Paying the Trustee Future Tax Refunds Is Usually Not So Bad

  • Usually you can minimize the issue by reducing the payroll tax withholdings made by your employer, thereby reducing that tax year’s refund. As a result you are giving yourself more money each month for living expenses or for making your Chapter 13 plan payments.
  • If you still do receive a relatively large refund during your case, and you have some out-of-the-ordinary urgent need for all or part of that money, you may be able to get trustee and/or court permission to use it for that purpose.
  •  Even to the extent that you still have refunds going to the Chapter 13 trustee during the years of your case, that money could well be doing some serious good work, such as:
    • In many situations that additional money beyond your regular monthly plan payments allows you to complete your case faster, giving you an earlier fresh start.
    • Important creditors would likely be paid more quickly—such as a child support arrearage or the payoff of a vehicle.
    • The extra money from the refunds may be critical in allowing you to pay off the plan within the mandatory maximum 5-years, so that you can discharge all your remaining debts and have a successful Chapter 13 case.


As with Chapter 7, you can usually time the filing of your Chapter 13 case so that you can keep your current-year income tax refund(s). But if you can’t wait to file, then under Chapter 13 you tend to have more control over what happens with the pending tax refund(s). You do have the disadvantage of losing some control over the next few years of tax refunds, but that is less of a practical problem than it may seem for the reasons just outlined. 

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