Chapter 13 Debtors had to Turn Over Exempt Tax Refunds (Earned Income and Additional Child Tax Credits) to the Trustee and Could Not Modify Plan to Retain Them

Chapter 13 Debtors had to Turn Over Exempt Tax Refunds (Earned Income and Additional Child Tax Credits) to the Trustee and Could Not Modify Plan to Retain Them

Debtors filed a Chapter 13 case. They and the Trustee have several “skirmishes” over tax refunds, exemptions and plan modifications.

Debtors’ confirmed plan contained the following plan provision:

“Debtor(s) projects income tax refunds during the term of this plan.  During the applicable commitment period of the plan, as defined in 11 U.S.C. § 1325(b)(4), the Debtor(s) will turn over to the Trustee all net income tax refunds.  At any time during the term of the plan, Debtor(s) shall be entitled to use a tax refund to pay taxes due any other taxing authority; however, the Debtor(s) shall remit any net income tax refund balance to the Trustee.  Upon the Trustee’s stipulation with the Debtor(s) and an order of the Court, the Debtor(s) may retain, in whole or in part, certain net income tax refunds during the term of the plan to facilitate the terms of this plan or to meet other reasonable and necessary needs of the Debtor(s). ”

The Debtors amended their schedules to disclose their 2015 income tax refunds, as well as to claim the Earned Income Tax Credit (EIC) and Additional Child Tax Credit (ACTC) amounts exempt.

The Trustee argued that Debtors should not be permitted to claim the 2015, post‐bankruptcy, EIC and ACTC amounts exempt.  In the alternative, if the credit amounts were exempt, then Trustee contends that the credits must, nonetheless, be included in Debtors’ income calculations, and as a result, are available to be paid into the plan.  Finally, Trustee urged that Debtors should not be allowed to “retroactively modify” the provisions of their confirmed plan which required turnover of the tax refunds.

While Debtors’ proposed modification is multi‐faceted, it is important to note what Debtors do not ask to do.  They do not seek to modify the terms of their confirmed plan to have future EIC’s and ACTC’s (the “tax credit” portions of their federal tax refunds) treated differently from that portion of their refunds attributable to overpayment of taxes through withholdings.  Rather, implicit in Debtors’ motion, is their request that the Court determine that refundable federal tax credits, such as EIC and ACTC, are not included within the term “tax refund,” as used in their confirmed plan.  If the Court accepts Debtors’ tacit invitation, it means, effectively that, under the terms of their plan, Debtors are not, and never were, required to turn those amounts over to Trustee.

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