In an opinion that reads like a father chastising his ungrateful children, the District Court for the Western District of Texas scolded the debtors for their proposed treatment of anticipated tax refunds and required them to adhere to the District Plan under which they could retain up to $2,000 of their refunds, but must turn over to the Trustee any amount remaining as disposable income. Vega v. Viegelahn, No. 18-796 and Diaz v. Viegelahn, No. 18-798 (W.D. Tex. Sept. 19, 2019) (consolidated for argument and decision).
Contrary to the District Plan structure, the debtors in this case sought to amortize their tax refunds as income over one year. Upon objection by the trustee, the debtors ultimately amended their plans to conform to the District Plan. They then appealed the Bankruptcy Court’s order of confirmation arguing that the District Plan’s treatment of the tax refunds violated various provisions of the Bankruptcy Code, the Local Rules and the Official Forms.
The district court began by noting that chapter 13 requires debtors to devote future income to their plans and that bankruptcy courts within the Fifth Circuit, such as In re Pautin, 521 B.R. 754 (Bankr. W.D. Tex. 2014), have determined that yet-to-be-received tax refunds are property of the bankruptcy estate. The trustee argued that the debtors’ proposed plans violated section 1325(a)(1) by not committing all disposable income including property acquired after commencement of the plan as contemplated by section 1306. The district court agreed, finding that the District Plan complied with these provisions of the Code.
With respect to the debtors’ argument that the District Plan violated the requirement that chapter 13 plans be individualized, the court found that the District Plan in fact incorporated individualized treatment by allowing debtors in 100% plans to retain their entire refunds and by permitting debtors in non-100% plans to spend the $2,000 they are permitted to retain in any way they choose.
The court turned to the debtors’ argument that the District Plan contravened Schedule 1’s requirement that tax refunds be amortized as monthly income, and that, by treating the refund as lump sum income, the District Plan required double accounting of the same income. Rejecting that argument, the court relied on Official Form 113, allowing a debtor to determine how his tax refund is to be treated, as evidence that the District Plan likewise provides an alternative treatment rather than contradictory or compounding treatment of the income. The court concluded that the District Plan strikes the appropriate balance between maximizing payments to creditors, and providing debtors with the means to deal with unanticipated expenses.
The court disagreed that the District Plan provision would have the undesirable effect of moving debtors to opt for chapter 7 over chapter 13, finding that chapter 13’s benefits, such as staving off foreclosure and collection activity on non-dischargeable debts, would continue to make chapter 13 a more attractive avenue for relief for debtors.
Finally, the court found that District Plan did not deprive the debtors of notice and the right to be heard under the Bankruptcy Code or Rules. The District Plan provides that a debtor may keep his entire refund if the Trustee does not object within twenty-one days. Contrary to the debtors’ argument, objection by the trustee triggers a motion, notice and hearing procedure.
The debtor in Diaz has filed an appeal to the Fifth Circuit, No. 19-50982.
Tags: Plan confirmation, Property of Estate, Tax Refund
