Can I Keep My Tax Refund in Chapter 13 Bankruptcy?

Many individuals pose the following question to their bankruptcy lawyer: “Can I keep my tax refund in Chapter 13 bankruptcy?” Many individuals want to know if they can use their tax refund to improve their finances while they are going through Chapter 13 bankruptcy. Kerney Law Firm can explain how Chapter 13 bankruptcy can affect your tax refund.

Chapter 13 bankruptcy utilizes a repayment plan to help the debtor resolve their debts. Individuals must devote themselves to repaying a portion of their debts over a period of three to five years. The amount the debtor must pay depends on the debtor’s income and the amount of that income the debtor can use to repay debts.

Tax Refunds and Chapter 13 Bankruptcy

A tax refund is categorized as disposable income when the filer has entered Chapter 13 bankruptcy. The trustee in bankruptcy may require you to contribute a portion of your tax refund to the repayment plan set by the bankruptcy court. Chapter 13 bankruptcy laws set it up so the creditors obtain regular payments while the debtor does not have to spend all their income on the repayment plan.

The major factors affecting whether a debtor will have to turn their tax refund over to the bankruptcy trustee include:

• The debtor’s monthly disposable income
• Any applicable exemptions and adjustments
• The timing of the tax refund

If a debtor has a small amount of disposable income, then the trustee may not require the debtor to submit all their tax refund.

Some exemption laws allow debtors to keep their tax refunds, even after they file for Chapter 13 bankruptcy. A debtor could adjust their withholdings to keep their tax refund. Also, if the tax refund is obtained during the bankruptcy process, then the trustee may require that it be included in the debtor’s repayment plan. If the filer receives their refund before filing for Chapter 13 bankruptcy, then the debtor could keep their tax refund.

What You Can Do to Protect Your Tax Refund

If you can control your tax withholdings, then you can choose to withhold less from your paycheck. You will then receive less of a refund, and this issue may not be as relevant when you choose to file for Chapter 13 bankruptcy. However, you should not reduce withholdings by a large amount because you may end up owing the IRS when you have to pay taxes.

In some circumstances, if you are supposed to receive a tax refund, then you could use it for exempt property, such as repairing a home or paying for necessities. You could use this method to retain more of your tax refund.

Also, you could negotiate with the trustee for your bankruptcy. The trustee may permit you to keep a portion of your tax refund if you can prove that you need the funds to pay for basic living expenses. You may need to review your overall repayment plan with the trustee and a bankruptcy attorney under these circumstances.

Hire a Bankruptcy Lawyer

If you are facing legal issues related to finances and are considering filing for Chapter 13 bankruptcy, then you may need to hire a bankruptcy lawyer. Your legal counsel can explain your legal rights and how you can protect yourself during this difficult time. A skilled bankruptcy attorney can provide you with reliable advice and clear guidance throughout the bankruptcy process.

Bankruptcy Statistics

Bankruptcy filings rose 13.1 percent during the 12-month period ending March 31, 2025. From December 31, 2023, through December 31, 2024, bankruptcy filings increased from 452,990 to 517,308.

FAQs

Does Chapter 13 Take Your Tax Refund?

Under Chapter 13 bankruptcy, you are generally required to provide your annual tax refund to the Chapter 13 trustee to pay creditors. Tax refunds are classified as disposable income and must be submitted to the trustee with a copy of your tax return. If you need the tax refund to pay for necessities, then an attorney can file a motion to keep all or a portion of the refund.

What Happens to Refunds During Bankruptcy?

Tax refunds are classified as property of the bankruptcy estate and are typically used by the trustee to pay creditors, but exemptions may permit you to keep a tax refund. Under Chapter 7 bankruptcy, you may protect a part of a refund through the use of exemptions. However, under Chapter 13, refunds are generally categorized as disposable income and must be turned over to the trustee.

Will I Lose My Tax Refund If I File for Bankruptcy?

You may not lose your tax refund if:

• You file for bankruptcy, and the tax refund is protected by an exemption.
• You file your taxes at the right time.

Tennessee law permits individuals to use personal property exemptions to shield assets such as tax refunds. However, under Chapter 13 bankruptcy, you may be required to pay some or all of your tax refund to the bankruptcy trustee to pay creditors if the tax refund is classified as disposable income.

What Should I Not Do During Chapter 13?

What you must not do during a Chapter 13 bankruptcy in Tennessee includes:

• Not accumulating more debt
• Not transferring or selling property
• Not missing any scheduled payments without a court order

All debt management must go through the Chapter 13 plan, and you must file all required tax returns. Your attorney can advise you further in your own bankruptcy case.

Reach Out to Kerney Law Firm Today to Schedule a Consultation

If you have questions about the status of your tax refund while filing for Chapter 13 bankruptcy, you may need to seek out a bankruptcy attorney. Your attorney can explain the scope of your legal rights regarding your taxes while you are going through Chapter 13 bankruptcy.

If you are seeking out an attorney in the Gallatin area, contact us today to schedule a consultation. We have years of experience in helping clients with legal issues related to tax refunds and Chapter 13 bankruptcy. Our team can meet with you and assess the facts of your case.