Many taxpayer rely on their tax refunds to pay certain expenses they cannot afford on their normal salary. People who have filed Chapter 13 bankruptcy sometimes ask me what happens to their tax refunds during their bankruptcy. Do they have to hand over their refund to the Chapter 13 trustee, or can they keep their refund as long as they are current on their bankruptcy plan payments?In most cases, a tax refund is part of the bankruptcy estate and must be surrendered to the trustee who would allocate the refund to the creditors. In our bankruptcy court the Chapter 13 exercises some discretion and may permit a debtor to keep a future refund for “emergencies” or priority expenses. Medical expenses and reasonable home repairs usually are consider valid reasons for keeping a tax refund, for example. The trustee can permit the debtor to apply a tax refund to pay property taxes for his home if they are not paid by the mortgage lender.
It is important that debtors request permission to keep tax refunds before they spend the refund. A Chapter 13 should ask their bankruptcy attorney to submit a request on their behalf as soon as they know the refund amount. Do not spend your refund unless your attorney tells you they have actually received trustee approval. If the trustee denies your request then you must surrender the tax refund to the Chapter 13 trustee.