Tax Time! What happens to your tax refund in bankruptcy?

The number of bankruptcy filings tends to decrease during the first quarter of the year (January through March) and then pick back up again through the rest of the year until the Holidays. The theory behind this is that people do not want to file for bankruptcy in the first few months because they do not want to lose their tax refund. Clients sometimes use their tax returns to pay attorney fees and filing fees for bankruptcy, which explains why the filings increase in the second quarter of each year.

So let’s take a look at what happens to your tax refund in bankruptcy.

Tax refunds in Chapter 13 bankruptcy: anything over $1,000 goes to your creditors.

Treatment of tax refunds in Chapter 7 bankruptcy and Chapter 13 bankruptcy are different. We’ll take a look at Chapter 13 cases first because they’re less complicated. So, how do tax returns work in Chapter 13 bankruptcy?

(If you’re not familiar with how Chapter 13 plans work, you may want to take a look at my previous posts about Chapter 13 bankruptcy, and Chapter 13 plans before reading on.)

If you are receiving a refund at tax time, then it is usually “extra money” in the sense that it is not included in the budget you filed with the court when you entered Chapter 13 bankruptcy. And because it is “extra money” it is sometimes subject to seizure by the trustee, and will be put towards repaying your creditors.

However, treatment of tax returns under Chapter 13 is relatively advantageous. In Utah, Chapter 13 plans generally include a provision that the debtor must show the trustee her tax returns each year, and must surrender any return over $1,000. So the good news is, you get to keep up to $1,000. And the other good news is that, even if you do have to give a portion of the refund up, it goes toward the arrearages, and other debts you owe in the bankruptcy, and it could help you complete the plan sooner!

Tax returns in Chapter 7 bankruptcy: the trustee is entitled any tax refund you would have accrued prior to filing, but sometimes it’s not worth it for them to bother taking the refunds.

As I mentioned, treatment of tax refunds in Chapter 7 bankruptcy is more complicated than Chapter 13. In short, what happens to your tax refund when you file under Chapter 7 depends on the time of year, amount of the refund, and part of the state you’re in, and trustee assigned to your case. I’ll try my best to demystify everything for you.

(Also, I should quickly remind everyone that this information applies only to bankruptcy in Utah. That is where I practice, and where I have experience dealing with tax refunds. This is one area of bankruptcy law where there can be really big differences between jurisdictions. So please keep that in mind as you read.)

First off, take a look at my previous posts discussing Chapter 7 bankruptcy if you are unsure of the difference between Chapter 7 and Chapter 13. A short summary is: when you file under Chapter 7, everything you own is transferred into a “bankruptcy estate”. The bankruptcy estate includes tax refunds, since it is money that would go to you – and then maybe to your creditors – if you had not filed bankruptcy.

So technically, the trustee has a right to your tax refund from last year, if you haven’t received it yet. And the trustee also has a right to any portion of the tax refund you would have accrued prior to filing bankruptcy. So, for instance, if you make a regular salary, and you file bankruptcy in July, half-way through the year, the trustee has a right to keep half of your tax refund.

In practicality, however, the trustee will sometimes not bother keeping track of you in order to claim her portion of your tax return. If you are waiting to receive a tax refund, but it is small, the trustee may not bother keeping it. If the trustee believes that your upcoming refund will be small, based on looking at your recent tax returns, then she will probably not require you to show her your upcoming tax returns.

Treatment of tax refunds in Chapter 7 is a judgment call for trustees, and different trustees will be more or less stringent about collecting them. That is why it makes a difference where you’re filing and which trustee is assigned to your case. (An aside: Chapter 7 trustees are appointed from a pool of dozens of attorneys, as opposed to Chapter 13, in which the same trustee’s office handles all Chapter 13 cases in the state. This makes things in Chapter 7 less predictable.)

The good news is, if it’s the first quarter, and you’ve already received (and spent) your tax refund, the trustee will not be able to take it from you (with some notable exceptions). On the other hand, if you filed chapter 7 during the time between filing your tax return and receiving your refund, you will probably have to turn it over to the trustee.

If you’re filing bankruptcy in the middle part of the year, then it will depend greatly on the trustee and the amount of the refund. If you’re expecting a large refund, then you should prepare to be giving at least some of it to the trustee at tax time.

That’s all for today, but be sure to check the rest of the posts on this site for more information about Utah bankruptcy law. Click here to visit my website, or call (801)200-3795 to discuss your financial trouble, I’m glad to help!


A Chapter 13 Bankruptcy Attorney explains the Chapter 13 Plan, Part III: how much will my plan cost?

In Part I, I explained the basic concept of chapter 13 bankruptcy. And in Part II, I got into some detail about secured debt versus unsecured debt, and how it affects your chapter 13 plan. Now I’m going to get into what you are probably most concerned with considering chapter 13 bankruptcy with an attorney in Salt Lake City: how much you’re going to have to pay. So let’s get to it. 

Chapter 13 Bankruptcy battle plan

Your chapter 13 bankruptcy battle plan.

The (overly) simplified formula for monthly payment amount:

(secured debts in arrears + Chapter 13 attorney fees + Chapter 13 trustee fees)/60

If you have a very basic case, then this formula will get you a good idea of what you’re looking at. Let’s continue using our previous example of the person who is $3,600 in arrears (behind) on their mortgage payment. We’ll assume that the mortgage payment is the only secured debt this person is behind on; although this is usually not the case. Clients of mine are often behind on second mortgages, as well as car payments and other secured debts in addition to their mortgage. 

Next we get to Utah chapter 13 attorney fees. The good thing about chapter 13 is that there are statutory fee amounts, and your Utah bankruptcy lawyer will generally stick to those amounts. In Utah, attorney’s fees are going to be $3,000, $3,250, or $3,500 depending on the complexity of your case and amount of debt you have. Generally your attorney will require a down payment up front, and what that amount is can vary widely from attorney to attorney, and is also dependent on your individual circumstances.

By way of quick advertisement, I am currently offering Chapter 13 bankruptcy for only $200 down, which is a great deal. Depending on when you read this article, I may not be offering this any more. But, you should give me a call (801.200.3795) and mention this post to find out! 


So, to get our second number we’ll take the statutory attorney fee (we’ll assume the usual $3,250), minus the downpayment (we’ll assume $200 according to my current special), which gives us a remaining fee of $3,050, which will be payed over the life of the plan along with the mortgage arrears. 

Finally, we add the trustee’s fee. Assume the trustee’s fee is 10% of your plan payment amount. Performing the arithmetic to technical perfection can be tricky. Here, we’re just trying to get a basic idea, so we’ll just take 10% of the sum of the secured arrears and attorney fee. (3600+3050)x0.10=665

Our final formula for our hypothetical person is: [(3600+3050+665)/60]. This comes out to a monthly payment of just under $122 per month. So, our hypothetical person will be paying their regular mortgage, plus $122 per month to catch up their back mortgage payments over a period of 5 years. At the end of this period, their mortgage and other secured debts will be caught up, and any unsecured debt they have, including thousands in credit card and medical bills will be discharged (erased!).

Sounds like a situation that could help that person out quite a bit right? And often times, my clients end up with a payment plan similar to this. However, I am assuming a very basic case here, and there are many many nuances that could make this plan turn out quite a bit different. This article is getting a bit long, so check back and I’ll discuss those nuances in Part IV. For now, here’s a bullet list of the gravestones I’m whistling past: 

  • Plan length – the plan may be shorter, and the payments larger. 
  • Amount due to unsecured creditors – in some cases, clients will be required to pay back a portion of their unsecured debts
  • Disposable income – in general, clients will be required to pay all of their disposable income into the plan. Thus, how disposable income is calculated becomes very important – and is one of the reasons you really need a Chapter 13 bankruptcy attorney if you’re filling bankruptcy in Utah. 
Click here to visit my website and contact me to discuss your financial trouble, I’m glad to help!