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How income tax refunds are treated under Chapter 13

South Carolina residents who are considering filing for bankruptcy sometimes wonder what would happen to their income tax refund should they decide to pursue this form of debt relief. This is especially true among debtors who are not able to file a Chapter 7 bankruptcy because do not meet the strict income requirements.

Chapter 13 requires debtors to use whatever disposable income they have to make payments under a plan approved by a bankruptcy court, and income tax refunds are viewed as personal income when these repayment plans are drawn up. This means that bankruptcy trustees will generally order that all income tax refunds be turned over for disbursement to the creditors involved.

However, there are situations where Chapter 13 bankruptcy filers may be able to keep their income tax refunds. They could petition the court before their repayment plan has been approved, or they could request a modification to a plan that is already in place. In either of these scenarios, debtors would have to establish that they have a good reason for keeping their tax refunds. Such reasons could include unforeseen expenses, the death of a loved one or an unexpected layoff.

Those struggling to cope financially are sometimes reluctant to pursue their debt relief options because of the many myths surrounding bankruptcy. They sometimes worry that their credit ratings will be irreparably damaged or their personal possessions will be gathered up and sold. Attorneys experienced in the area of debt relief may be able to ease these concerns by explaining that the bankruptcy laws are designed to provide individuals with the opportunity for a fresh start and not to punish.

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