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Tax refunds and Chapter 13 bankruptcies

On Behalf of | Jun 29, 2016 | Bankruptcy

Virginia residents who have more debt than they can afford to pay off in a reasonable amount of time may decide to file for bankruptcy. Individuals may choose to liquidate all of their available assets to pay off creditors under Chapter 7 bankruptcy or develop a repayment plan under Chapter 13 bankruptcy and keep assets like a house and a car.

Chapter 7 bankruptcy is not available to debtors who earn an income that is higher than the median income in Virginia. Debtors who must file under Chapter 13 are required to use their disposable income to pay a portion of their outstanding debts under a court-approved repayment plan that lasts for a period of three to five years. The debtor may be ordered to surrender a tax refund or inheritance that is received during the pendency of the plan so that those funds can be used to pay off creditors.

A person who files for Chapter 13 bankruptcy may be able to keep a tax refund in some circumstances. Before the court approves a repayment plan, the debtor could petition the court for permission to keep an anticipated tax refund check. If the Chapter 13 repayment plan is already set, a debtor that wants to keep the tax refund must ask the court to modify the plan. In both cases, the debtor must have a reason to justify keeping the tax refund such as an unexpected medical expense.

Chapter 13 can provide those who qualify for it with relief from overwhelming debt. It is meant for debtors who have a regular source of income, and an attorney can describe the eligibility requirements.