Tax Refund Anticipation Loan during Chapter 13 Bankruptcy

A Chapter 13 bankruptcy is a three to five year commitment between the debtor, his attorney, the trustee, and the bankruptcy court. This relationship does not stop once the debtor’s proposed repayment plan is confirmed by the court. The debtor is expected to cooperate with the trustee’s requests and the requirements of the bankruptcy throughout the case.

In a Chapter 13 case the debtor is prohibited from obtaining credit without prior approval from the trustee and bankruptcy court. An income tax refund anticipation loan, check, or temporary debit card is an extension of credit secured by the debtor’s tax refund, and just the sort of loan that is banned. These short-term are commonly offered by preparers during tax season, and are akin to payday loans with high interest rates.

Tax anticipation loans are not allowed during a debtor’s Chapter 13 plan. Not only are these loans an unauthorized use of credit by the debtor, the tax refund itself may be (and often is) part of the debtor’s estate. In most cases the Chapter 13 bankruptcy trustee will allow the debtor to keep a small refund or part of a refund for reasonable and necessary expenses (such as auto or home repairs, etc.). However, the trustee may seek turnover of some or all of the debtor’s tax refund to use toward paying creditors in the bankruptcy case. By obligating yourself to a tax refund loan, you may complicate your finances considerably. The trustee may avoid the loan and take all of the refund, leaving you with a post-petition debt that is neither dischargeable nor stayed by the bankruptcy case.

Before you agree to an income tax refund anticipation loan or other credit, speak with your Chapter 13 attorney. In most cases the advice is clear, “Don’t do it!” Your attorney is your advocate and counselor during the case, so do not hesitate to call to discuss your financial matters.