November 24, 2017

Why Tax Refunds Payable to the Chapter 13 Trustee Will Do Little to Decrease Your Plan Balance

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 [Read more…]

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