Debtor Doesn’t Have to Turn Over Tax Refund to Trustee

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By Diane Davis

A Chapter 13 debtor won’t have to turn over her entire tax refund to the trustee but must amend her bankruptcy forms to include it as additional income to be offset by expenses, the U.S. Bankruptcy Court for the Northern District of Illinois held Feb. 27 ( In re Morales , 2017 BL 60225, Bankr. N.D. Ill., 16 B 21624, 2/27/17 ).

Crystal Morales received a payment based on tax credits for low-income workers, but can spend that money on expenses to support herself and her two children, Judge Carol A. Doyle said.

Morales is self-employed and earns $1,000 per month. She also receives $500 monthly from food assistance programs. The debtor’s “tax refund” of $5,350 consists of an earned income credit of $3,350, a child tax credit of $1,000, and an education credit of $1,000, the court said.

Morales proposed making monthly payments of $400 in her Chapter 13 plan, which allows her to obtain debt relief while retaining her property. But to do so, she must propose a plan that uses future income to repay all or a portion of her debts over a three to five year period.

The trustee wanted Morales to turn over her refund because she will receive similar “refunds” during each year of her plan. The definition of current monthly income in Bankruptcy Code Section 1325(b)(2) requires it because it doesn’t exclude income received through tax credits, the trustee argued.

The court rejected that, concluding debtors have choices on how to deal with expected tax refunds. They can turn them over to eliminate the need to determine a reasonable tax expense to deduct from current monthly income, or they may deduct a reasonable estimate of their actual tax expense, the court said.

In cases like this where the “refund” is generated from tax credits to low-income workers, debtors may prorate the expected “refund” over 12 months, which increases their current monthly income calculation by one-twelfth of the expected annual payment, the court said.

Morales must file amended bankruptcy forms prorating additional income and expenses, the court said. If the expenses are reasonable, they may be deducted from the debtor’s current monthly income to determine the appropriate plan payment, the court said. That way, the plan will be confirmed without language requiring payment of expected tax credits, the court said.

Other Chapter 13 trustees in this district exercise their discretion not to seek payment of tax credits from low-income debtors, the court said. This approach is consistent with allowing debtors to keep all or a portion of their tax refunds to cover unplanned expenses, the court said.

The Semrad Law Firm, LLC, represented Morales; Lauren L. Tobiason, Office of the Chapter 13 Trustee, represented Trustee Marilyn O. Marshall.

To contact the reporter on this story: Diane Davis in Washington at

To contact the editor responsible for this story: Jay Horowitz at

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