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Chapter 13 bankruptcy and income tax refunds

Florida residents who wish to pursue debt relief are sometimes deterred because the required means test precludes them from filing a Chapter 7 bankruptcy. While a Chapter 13 filing may seem to be a less attractive alternative, it does provide the opportunity to escape oppressive debt and secure a fresh financial start. However, many debtors considering this option wonder what would happen if they were to receive an income tax refund or some other financial windfall.

When an individual files a Chapter 13 bankruptcy, a a repayment plan is prepared that requires payments to be made for between three and five years. When these payments are made, they are distributed to the creditors involved by the bankruptcy trustee. All of the debtor’s disposable income is taken into consideration when these plans are drawn up, and that includes any income tax refunds that the debtor may receive.

However, those who can establish a good reason for keeping their income tax refunds may petition the bankruptcy court before their Chapter 13 repayment plan has been approved or file a for a modification if the plan has already been put into place. Debtors hoping for such accommodations must convince their bankruptcy trustees that they need their income tax refunds because of an unexpected bill or some other change in their financial situation.

Doubts and concerns over income, tax refunds or assets often prevent those with unmanageable financial situations from pursuing debt relief. Many Florida residents who are struggling to make ends meet endure persistent harassment from their creditors because they fear that filing for bankruptcy will damage their credit ratings beyond repair or lead to their personal belongings being gathered up and sold off. Attorneys may be able to put these fears to rest by explaining the way that the bankruptcy laws work and how they are designed to help those in financial distress rather than punish them.

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