Annual Budgets and Tax Refunds

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 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.  A failure to file the annual budget, turn over copies of the tax return and refund will cause the Chapter 13 to be dismissed.  In Eastern Kentucky and Indiana debtors keep tax refunds and don’t turn in annual budgets.

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 at the time you file but you may not have it yet. Indiana only has a 300 dollar exemption for intangible property so you lose any bank deposits and tax refunds over 300 dollars. In Kentucky, one half of the unused portion of the real estate exemption can be used as a wild card. Up to 12,500 in exemptions can 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 is 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. In Western Kentucky you are allowed to keep the earned income credit, but you cant keep the Child Tax Credit. You can also keep the amount paid to prepare their tax forms.  If you get a refund from the Federal but owe the state you can net that out.  Therefore if you get 2000 from the Feds and owe 500 to the state the Trustee must be paid 1500 minus any earned income credit and tax preparation fees.  If you fail to turnover the refund the Trustee in the Western District of Kentucky will motion to dismiss the case.

If you file an extension send the Trustee a copy.  A budget is also 15th with the refunds and returns. The Trustee at 502-581-9042 – Hit 0 will confirm receipt. If they don’t get it by June 15th they file the motion to dismiss.  If you spent the money for a medical emergency the court may approve it.  Otherwise it must be repaid within 12 months by increasing plan payments.

Timing your filing

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.

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