Annual Budgets and Tax Refunds in Bankruptcy

In some districts like Louisville annual budgets and tax refunds must be submitted.  A Debtor is required to use their best efforts to repay their debts.   This is part of a bargain in bankruptcy.  In a Chapter 7 or  Chapter 13 the Debtor has to prepare and live on a budget.  This budget is in Schedule I, J and the Chapter 13 plan.  It outlines how there is either money to repay the debts or how there is not.   The Debtor keeps a reasonable amount of property and only disposable property and income is paid to creditors.

A tax refund is a bonus.  Something more than your monthly income which you are supposed to live on.  It is also an asset.   In Western Kentucky Chapter 13 cases it is handed over to the Trustee annually to repay creditors.  In Eastern Kentucky and Indiana debtors keep tax refunds and don’t turn in annual budgets.  In the Western District of Kentucky a failure to file the annual budget, turn over copies of the tax return and refund will cause the Chapter 13 to be dismissed.

Chapter 13 Annual Budgets

Each year in the Western District of Kentucky Chapter 13 debtors are required to turn in an annual budget and their tax returns.   If the annual budget shows income has increased, then the plan payment may increase.   Normally there is a small increase in income and a small increase in expenses.  The plan payment will tend to remain the same.  However the plan payment can increase or decrease.  If your income only went up 10 dollars don’t expect your plan payment to increase.  If your income doubles from 50,000 to 100,000 due to promotion expect the plan payment to increase.

Keeping Tax Refunds in a Chapter 7

Your tax refund is also an asset.  It belongs to you are the time you file but you may not have it yet.  In Indiana you only have a 300 dollar exemption for intangible property so you lose any bank deposits and tax refunds over 300 dollars.  In Kentucky you have about 12,500 in exemptions to cover your tax refund and bank deposits if you use the real estate exemptions as a wild card.

One strategy is to file a Chapter 7 bankruptcy after you have received and spent the tax refund. If you file a Chapter 7 Bankruptcy after you get your tax refund and after you have spent it there is nothing for the trustee to take. Timing can be important. Many states like Kentucky use the Federal exemptions which are so large that it is rare to lose a tax refund in a Kentucky Chapter 7. However in Indiana this is Several states have exemptions that are larger than the Federal exemptions.

Keeping Tax Refunds in a  Chapter 13

In a Chapter 13 you will normally lose your tax refund if the plan pays less than 100%. If the plan repays 100% then there is no reason to turn over tax refunds, personal injury settlements or inheritances the debtor may receive during a Chapter 13.   The timing of when, where and what type of bankruptcy to file is essential when your bankruptcy involves income tax debts or refunds. Often the best approach to prevent losing the tax refund is to claim additional exemptions to ensure you don’t have a tax refund while you are repaying in a Chapter 13.

Timing and planning are everything. This is why you need good legal advice when you file bankruptcy so it is done properly. You need someone who knows this area of law completely and that will help you to plan this to your best advantage never do this yourself.