The trustee cannot compel a chapter 13 debtor to turn over 100% of future years’ income tax refunds, so long as the debtor has prorated the refunds in calculating projected disposable income.
Bankruptcy Judge Carol A. Doyle of Chicago said that Section 1325(b)(2) allows debtors “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 case involved a grandfather who was receiving a $2,400 federal income tax refund for 2016. The trustee objected to confirmation of his plan unless he turned over 100% of the refund on receipt.
Judge Doyle overruled the objection and confirmed the plan.
The 2016 tax refund was comprised mostly of an earned income tax credit and a child tax credit, because the debtor claimed his grandson as a dependent. The grandson lived with him during the school year and resided with his mother the other three months.
By agreement, the debtor paid his grandson’s mother half of his tax refund, or $1,200, to cover the child’s expenses during the summer.
In calculating “current monthly income,” the debtor prorated his 2016 net tax refund by showing additional income of $100 a month, after deducting the $1,200 he would pay the child’s mother. To determine “projected disposable income,” the amount that must be paid to creditors, the debtor deducted the expenses for his own support and support of his grandson.
The calculation resulted in a plan paying $525 a month for the duration of the debtor’s 36-month plan. Judge Doyle said the debtor was current in his plan payments.
Judge Doyle said the debtor calculated the plan payment “exactly as required by Section 1325(b), so he need not pay future tax ‘refunds’ to the trustee.” As a fact, he also found that paying half of the refund to the mother was a reasonably necessary expense for support. Rather than paying the refund in a lump sum once a year, she said that “Schedule I and the instructions for completing the bankruptcy forms require [emphasis in original] a debtor to prorate all income not received monthly.”
The trustee argued that the plan was not feasible because the tax refund was not received throughout the year. The trustee also contended it would be impossible to predict future tax returns accurately, thus necessitating a debtor to turn over future refunds on receipt.
Judge Doyle rejected the arguments. By demanding that debtors pay over refunds in full, she said the trustee sought “to prevent them from deducting any expenses from that income.” She said that Section 1325(b) allows a debtor “to deduct his reasonable expenses from all [current monthly income], not just [current monthly income] received on a monthly basis.”
On the question of feasibility, Judge Doyle cited Hamilton v. Lanning, 560 U.S. 505 (2010), to mean that a debtor can modify a plan if “there are significant unexpected changes in income or expenses after confirmation.” Again citing Lanning, she said that the refund for 2016 “is the best estimate of his income to use in calculating projected disposable income.”