When you withhold too much during the tax year, the IRS will return your money in the form of a tax refund after your tax return is filed and processed. What happens to this tax refund during a Chapter 13 bankruptcy case depends on the policy of the Chapter 13 trustee.
Many Chapter 13 trustees consider your income tax refund “disposable income.” Without getting bogged down with a lengthy discussion of what “disposable income” means in a Chapter 13 case, suffice it to say that a Chapter 13 debtor is expected to repay all debts that he or she can reasonably afford. A trustee may consider your income tax refund as “extra money” that is not needed for your family’s welfare during the year. Consequently, this money should go to repay your debts.
Money is obviously tight during a Chapter 13 repayment plan, and most debtors can ill afford to lose their income tax refunds. This is why it is important to consult with a tax expert and adjust your withholding. Withholding too little may create a heavy tax burden at the end of the year that could cause your bankruptcy to fail. Withhold too much, and your money may be taken by the Chapter 13 trustee. Consequently, having your tax withholding reviewed periodically by a tax expert will avoid these two extremes, keep the money in your pocket, and avoid IRS tax debt. Small withholding adjustments can pay big dividends.
Successfully navigating through a Chapter 13 case requires the care and attention of an experience bankruptcy attorney. If you are dealing with financial hardship, discuss your situation with experienced legal counsel. Your attorney can offer options, including those found in the federal Bankruptcy Code. Bankruptcy offers permanent relief for discharging and restructuring your debts, and presenting you with a fresh financial beginning.