Debtors Restricted by District Form in Treatment of Tax Refund

Posted by NCBRC - June 29, 2018

A District Form Chapter 13 Plan’s treatment of debtors’ tax refunds as disposable income was not contrary to the Code and could not be altered by individual debtors. In re Vega-Lara, No. 17-52553 (Bankr. W.D. Tex. May 4, 2018).

Carlos Vega-Lara and Aura Cecilia Vega filed an amended chapter 13 plan using the court’s District Form plan as required by the bankruptcy court. Their plan proposed to pay priority claims and administrative costs at 100% and unsecured nonpriority creditors at 24%.

With respect to their anticipated tax refunds, two provisions of the District Form were relevant. Section 4.1 required that for a debtor paying less than 100% to unsecured creditors any tax refund in excess of $2,000 had to be turned over to the trustee as disposable income. Section 8 provided a space for debtors to note any part of their proposed plan that did not conform to the District Form. In this case, the debtors crossed out section 4.1 and noted in section 8 “Section ‘4.1 Tax refunds’ is stricken. Debtors’ projected tax refund is amortized and treated as income on schedule I.” The debtors argued that to treat the tax refund as required by the District Form would capture non-disposable income in violation of section 1325 of the Code.

The trustee objected to the plan because it did not conform to the District Form and, alternatively, because it was infeasible.

The court began by confirming the legitimacy of district form plans in general under Rule 3015.1 and stated that if debtors can change their terms, the forms would be rendered meaningless. Citing In re Pautin, 521 B.R. 754, 763 n. 9 (Bankr. W.D. Tex. 2014), the court noted that the District Form was intended to provide the debtors with $2,000 cushion for unexpected expenses and the treatment of tax refunds as disposable income was in line with other decisions out of the Fifth Circuit.

The debtors argued that the instructions for Schedule I compelled their proposed treatment of their tax refunds. The court disagreed finding their position undermined by the fact that the language in the instructions was Schedule I was also contradicted by the national Official Form 113 which allows debtors to determine how their income tax refunds will be treated under a plan. Cases out of other circuits in which the courts found that debtors who had amortized their tax refunds in Schedule I could not be compelled to turn over the refunds, were likewise unpersuasive as those cases did not involve district forms that dictated the treatment of tax refunds.

Finally, the court agreed with the trustee that the debtors’ plan was infeasible as they were delinquent on both their utility bills and their children’s private school tuition and planned to use the tax refunds to correct those delinquencies. Rather, the court found, the debtors should amend their withholding exemptions to increase their monthly income.

The court denied confirmation of the debtors’ amended plan and gave them fourteen days to propose a new amended plan or be dismissed.

VegaLara Bankr WD Tex May 2018

See also, In re Orozco, No. 17-52818, 2018 Bankr. LEXIS 1427 (Bankr. W.D. Tex. May 10, 2018), and In re Diaz, No. 17-52761, 2018 Bankr. LEXIS 1429 (Bankr. W.D. Tex. May 14, 2018).

Diaz Bankr WD Tex May 2018 Orozco Bankr WD tex May 2018


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