Tax Refunds and Chapter 13

On January 27, 2010, the U.S. Bankruptcy Court for the Eastern District of Michigan (which covers Detroit, Bay City, and Flint) posted a notice on its website (available here) regarding the treatment of tax refunds in Chapter 13 cases, in light of the Eastern District of Michigan’s holding in United States v. Carroll , __ B.R.__, 2010 WL 338040 (E.D. Mich. 2010), a case I recently discussed here. In short, United States v. Carroll prohibits the bankruptcy court from entering any order confirming a Chapter 13 plan if the plan directs the Internal Revenue Service to pay the debtor’s tax refunds to the Chapter 13 trustee. Further, the decision prohibits the Chapter 13 trustees in our district from seeking to enforce orders that have already been entered confirming a Chapter 13 plan, if those such orders direct the Internal Revenue Service to pay the debtor’s tax refunds to the Chapter 13 trustee instead of to the debtor.  It had previously been the practice of this Court, in cases where a Chapter 13 confirmation order required the turnover of a debtor’s tax refunds to the Trustee, to include in that order a provision ordering the Internal Revenue Service to pay those refunds directly to the Trustee.  This practice is no longer permissible under United States v. Carroll.

In order to comply with the new rule, the Eastern District of Michigan Bankruptcy Court issued a new notice on March 12, 2010 (available here) stating that, in each case where an order confirming the Chapter 13 plan has not yet been entered and in which the debtor’s plan provides for the payment of tax refunds to the trustee, the debtor shall sign, as requested by the trustee, (1) IRS forms that authorize the IRS to forward the debtor’s tax refunds directly to the trustee, whether by check or direct deposit, and (2) forms that will authorize the trustee to endorse, negotiate and deposit the debtor’s tax refund check for the debtor’s Chapter 13 account.  In cases in which the meeting of creditors has not been held, the debtor shall sign these forms at the meeting of creditors.  In cases in which the meeting of creditors has been concluded, the debtor shall sign the forms at the confirmation hearing or as a condition of confirmation, as directed by the bankruptcy judge.

The notice applies to Chapter 13 cases in which the meeting of creditors or the confirmation hearing is on or after Friday, March 26, 2010.  For more information about bankruptcy-related tax issues, see John O’Connor’s articles on the National Bankruptcy Forum,  “Be Careful With Tax Refunds in Bankruptcy” and “What happens to property I acquire after filing for bankruptcy?”, as well as my recent entry which can be accessed here.

Drew Broaddus