Can I Lose My Tax Refund If I File Chapter 13 Bankruptcy in New York?

If you file a Chapter 13, whether you can keep your refund depends of the policies set by your Chapter 13 Trustee and the Court.

If you are under the median income when you file, the Trustee may consider your yearly tax refund to be disposable income and require it to be paid into your Chapter 13 plan.  In the Northern District of New York, the Chapter 13 Trustee considers any tax refund over $1,500 to be disposable income and will want it paid into your plan, in addition to your regular monthly payments.  The $1,500 applies whether the bankruptcy was filed by one person, or both spouses.  If only one spouse filed the bankruptcy but they filed a joint tax return, the Trustee will allow the non-filing spouse their one-half of the refund, allow the debtor to keep $1,500, and take the remaining amount.

If you file a three year bankruptcy plan, the Trustee would get the excess refund each year, but does not lower the amount you otherwise have to pay to the plan.  If you file a five year bankruptcy plan, after the first three years the excess tax refund funded into the plan is credited to the total amount you need to pay into the plan and does lower the amount you otherwise have to pay to the plan.

Under BAPCPA, a two-tiered system was set up that treats people over the median income differently than those under the median.  Under the median debtors must pay their disposable income to the trustee, which could include their excess tax refunds.  Over the median debtors have their “disposable income” determined by the “means test” and their excess tax refunds are not considered part of their disposable income, and do not have to be funded to the Chapter 13 Trustee.  This is just one of the many unjust provisions of BAPCPA that hurts those least able to pay their creditors.