The rules affecting what happens to Chapter 13 debtor’s tax refunds while they are in bankruptcy differ depending on where the case is filed. These rules are generally set out in the local rules of the court or a general order.
In the Eastern District of Texas, the Chapter 13 Trustee will allow a debtor to keep a tax refund if it is for $2,000 or less. If the refund is more than $2,000 then the Trustee will take the entire refund and pay it to the general unsecured creditors in the bankruptcy case. In the Northern District of Texas, the Chapter 13 Trustee will allow the debtor to keep the first $2,000 they receive from their tax refund. Any additional amounts received will be paid to the general unsecured creditors. However, in both districts, if the debtor owes back taxes the IRS may elect to offset a pre-petition refund, meaning they may keep it and apply it to any back taxes the debtor owes to the Internal Revenue Service.
The rules affecting tax refunds are just one example of how bankruptcy cases affect debtors differently depending on where they live. Before you file bankruptcy, it is important that you speak with a local bankruptcy attorney with experience filing cases in the same district in which you will file.