The treatment of tax refunds in Chapter 13 cases is a lot different than in a Chapter 7, not only in Michigan, but in a lot of other districts as well. State refunds are easy so we will get those out of the way. The debtor gets to keep the Michigan refund but has to turnover the Federal refund.
To avoid relying on the debtor to turn the refund over, the model plan had language in it which ordered the IRS to turn the refund directly over to the Trustee. The IRS got annoyed about this and sued to stop this order and won.. This doesn't mean the debtor gets to keep the refund. It just means the IRS doesn't want to be involved. Now the Trustee requires the debtor to sign a power of attorney giving the Trustee the power to receive the refunds.
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Meanwhile, the Trustee and the IRS continue to fight in court so this post will have to be continued when it is resolved. Federal tax refunds and credits are considered disposable income in Michigan. They need to be turned over to the Trustee for payment to creditors during the length of the plan which is usually three to five years. In this district, there are a lot of issues about the Federal tax refund. Failure to turn it over results in a lot of cases being dismissed.
Neither the bankruptcy judges or the Trustees like to see a confirmed case get dismissed. If the debtor can show need, they can request that they be allowed to keep their Federal refund. Need could be something like a new washer or dryer because yours broke; repairs to the house like a leaking roof; or maybe for a down payment on a replacement car. It is a lot more work than just sending a letter to a judge. A motion must be filed and served on all the creditors and Trustee. If there are no objections, you will most likely be able to keep some or all of the refund.
To learn more about bankruptcy, please take some time to visit my website at: Downriver Bankruptcy.
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