Tax Refunds in California Chapter 13 Bankruptcy

Exclusion of Tax Refunds in California Bankruptcy Cases

Filing for Chapter 13 bankruptcy protection comes with its requirements just as in any other form of individual or business case, among the basic requirements in Chapter 13 bankruptcy case is the need to provide tax refunds. 

When filing for a Chapter 13, the courts would require you to hand over your tax refunds to the appointed trustee to pay off your creditors. This is unlike a Chapter 7, which does not take into consideration your tax affairs as being part of your bankruptcy estate.

In Chapter 13, all of the debtor’s disposable income is channeled towards repaying their creditors through the court-appointed trustee. In some situations, however, California bankruptcy courts would excuse one from having to include their tax refunds in the bankruptcy estate.

The inclusion of the tax refunds in the bankruptcy estate stems from the fact that the trustee may not have included it in the calculations of your necessary expenses when formulating the Chapter 13 bankruptcy plan.

Thus one can dispute its inclusion when it comes up after Chapter 13 protection is underway.

To do that, however, you would have to submit the proof in a California bankruptcy court that you will depend on that tax refund to make your repayment plan work.

One way to do this is to argue that your necessary expenses increased, which the initial plan would likely not have taken into account, thus requiring you to keep the refunds to meet daily expenditure.

An alternative way of getting your tax refund excused is to include a provision in the initial version of the repayment plan excusing you from having the tax refunds in the calculations.

However, you would have to be careful in this strategy to avoid objections of the creditors and trustees, who may view the refunds as being surplus cash. Asking for a limited amount of the tax refunds, in this case, could increase your chances of being excused from having to use it in debt repayment.

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