Expert: Terry Leeders - 6/9/2008

Question
I filed Chapter 13 in 2005.  At the time I went to court I understood the reason for requiring 50% of ALL income tax refunds was to insure my monthly payments did not fall short when it came to the end of my bankruptcy.  As I knew my monthly payment would sufficiently cover the agreement I never turned my refunds over, instead I used it to pay medical bills, unexpected living expenses, and to purchase a 14 year old automobile to replace my 13 year auto that recently died.
My creditors agreed to a 70% payout.  I am less than 2 months from satisfying that agreement and in the process of attempting to purchase a new home (and sell this one), however the Trustee is now demaning 50% of my income tax refunds for the last 3 years in order to 'consider' writing a letter giving me permission to buy the new home and sell my existing home.

When I stated that by turning in these refunds (which I don't have by the way - not like I poked it in a savings account anywhere) I would exceed the terms of the Chapter 13 agreement they are now saying then they will pay the creditor off at 100%.

Now I have no idea where I will come up with the refunds of the past 3 years, I'm sure my lawyer is going to back the Trustee and tell me I just understood the instructions wrong, and I can't buy or sell a home - at least until 2010.

So what was the benefit of filing Chapter 13?

Answer
Unfortunately, Your chapter 13 plan as required by your case had you turn over the tax refunds into the case.  Failure to do so is grounds for dismissal.  Now, it sounds like you are bringing a motion to get permission to buy a new home, which triggered an audit of your file at the trustee's office. Depending on how your plan read, you may have been paying a minimum percentage + the refund amount, so the exact payout wouldn't be able to be determined, as refunds can change.  I understand that you spent the refund on necessities, but, unfortunately, that doesn't matter.  You will have to start sending more funds in to the court to avoid a motion to dismiss.  Perhaps your attorney can bring a motion to modify your plan as well.  You should speak to them to get the best advice based on your case, and your local jurisdiction rules.