At least two of the three Chapter 13 trustees in the Northern District of Georgia require a Chapter 13 plan provision which provides that any tax refund payable to the debtor during the term of the debtor’s plan shall be paid to the Chapter 13 trustee. These trustees will object to any plan that does not include a tax refund provision.
Although I explain the implications this provision, many of my clients express shock and outrage when their expected refund of $3,000, $4,000 or more does not show up in their mailboxes, but instead ends up in the hands of the Chapter 13 trustee. These clients, quite naturally, expect that the tax refund payment will reduce their Chapter 13 obligation and either reduce the term of their plans or possibly allow for a reduction in the regular monthly payment.
More recently one of my clients fell behind on his Chapter 13 plan and had to enter into a consent order with the Chapter 13 trustee to pay extra each month to cure the delinquency. Shortly after the consent order was filed, this client saw a $2,200 tax refund to to the trustee and he wanted to see that money applied to his delinquency and thus reduce the burden of his delinquency cure.
Unfortunately in both of these situations, my clients will not get the desired benefit from the “seizure” of their tax refunds. The funds will go into the plan, but instead of reducing the balance or the term of the plan, they will increase the dividend payable to unsecured creditors
Why? The trustee’s position is that a debtor who is eligible for a tax refund has had too much withheld from his paycheck. In other words, by having too much withheld, the debtor/taxpayer is essentially putting money into a savings account (a savings account that amounts to an interest free loan to the government, but that is another story). Presumably, if the debtor had the correct amount withheld, there would be more disposable money available for the debtor’s Chapter 13 plan. Unsecured creditors should not bear the burden of a lower plan dividend so that the debtor can have a savings account.
Given that this is the trustee’s position, I advise my clients to adjust their withholding numbers so that there will be little or no refund payable at the end of the tax year. Assuming that there is some flexibility in the debtor’s budget, the “extra” money can be allocated to approved expenses and what I call expected emergency categories, such as medical costs, transportation costs, even food. If “extra” money is needed down the road, my client can tighten his belt some, but still have enough to survive. This approach, in my view, clearly beats giving up one’s expected emergency funds to the Chapter 13 trustee.