Chapter 13 Debtor Can Keep Income Tax Refund

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By Diane Davis

A Chapter 13 debtor who prorated his expected income from his tax refund over 12 months and properly calculated his plan payment doesn’t have to pay future tax refunds to the trustee, the U.S. Bankruptcy Court for the Northern District of Illinois held March 13 ( In re Gibson , 2017 BL 78284, Bankr. N.D. Ill., No. 16 B 25231, 3/13/17 ).

The question of how to treat a debtor’s expected tax refund is a common one that comes up frequently, and this is the second case in this district to rule against the trustee.

Tyrome Gibson received a $2,389 “refund” based on the federal child and earned income tax credits , and excess withholding by his employer. His grandson lives with him for nine months of the year while he attends school. During the summer, the grandson lives with his mother.

Gibson and the woman agreed that he would claim the child as a dependent on his tax returns, and pay her half of any tax refund to support the child during summer. As a result, the child’s mother received $1,200 of Gibson’s expected refund.

Chapter 13 trustee Marilyn Marshall objected to Gibson’s plan because he didn’t turn over all of his tax refund as additional plan payments.

In Chapter 13, individuals receiving regular income can obtain debt relief while retaining their property, but to do so, the debtor must propose a plan that uses future income to repay all or a portion of his debts over a three- to five-year period.

The debtor isn’t required to pay future income tax refunds to the trustee, Judge Carol A. Doyle said.

Relying on her analysis in a similar case, In re Morales, 2017 BL 60225, (Bankr. N.D. Ill., No. 16 B 21624, 2/27/17), Doyle found that the debtor would receive approximately $1,200 in additional income for 2016 after he files his tax return.

Gibson also pays half of his tax refund each year for expenses that are reasonably necessary to support his grandson during the summer, the court said.

The court rejected Marshall’s practice of insisting debtors who propose to pay unsecured creditors less than 100 percent of what they are owed must turn over all tax refunds received after confirmation without deducting any expenses from them.

She has no similar practice for debtors who don’t receive tax refunds or credits but receive all of their annual income through wages, the court said. As a result, debtors with the same annual income are treated differently depending solely on when they receive the income, the court said.

Bankruptcy Code Section 1325(b)(2), which addresses getting the approval of a debtor’s Chapter 13 plan, doesn’t authorize this sort of discrimination, the court said.

“All debtors are entitled to deduct reasonably necessary expenses from all the income they receive, whether they receive that income regularly as wages or only once a year in the form of tax refunds or tax credits,” the court said.

Law Office of Thomas W. Drexler represented Gibson; Lauren L. Tobiason, Office of the Chapter 13 Trustee, represented Marshall; Patrick S. Layng, Office of the U.S. Trustee, Region 11, represented the U.S. Trustee.

To contact the reporter on this story: Diane Davis in Washington at DDavis@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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