Tax Refunds After Filing for Chapter 13 Bankruptcy

A Debtor in Chapter 13 Bankruptcy is required to pay all disposable income (income remaining after all expenses and deductions are accounted for) into a repayment plan over three to five years. When a Debtor receives a large income tax refund during that period, the presumption is the money is disposable (i.e., that it's not needed by the Debtor but should go to his or her creditors).  The majority of Chapter 13 Trustees will ask for an "unneeded" refund, so it's important to take steps to protect this money.  Unexpected expenses arise, no matter how carefully you budget, so it is extremely rare to have "unneeded money" during a Chapter 13 Bankruptcy.

Most Debtors make an adjustment to federal tax withholding to prevent a problem with the income tax refund.  In Houston and the surrounding areas, the Chapter 13 Trustees will allow you to keep the refund, provided you are current on the Chapter 13 plan payment.  The best way to avoid problems is to minimize the refund through proper withholding adjustments.  You may want to consult with a tax professional or accountant to determine the best option for your situation.

While adjusting your withholding sounds simple, withholding too little could create a tax debt leads to further problems. Adding new tax debt will only cause more headaches and issues during the Bankruptcy process.  In some cases, the debt can be paid during the Bankruptcy case.  In rare cases, depending on the tax liability, you case may be dismissed.

If you are deciding whether to file for Chapter 13 Bankruptcy, be sure to address your withholding status during the FREE consultation with my office.  It is critical to adjust your withholding correctly now - before huge problems arise after you file.  Ideally, your return should show little to no refund, as well as little to no tax liability.  If you are self-employed, these issues are even more important.  To learn more, please call  the Law Office of Nicholas R. Westbrook today at (713) 893-6204.  We have  convenient office locations in Houston and the surrounding areas.  The road to financial freedom starts here.