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Avoiding tax issues during Chapter 13 bankruptcy

Chapter 13 bankruptcy allows individuals to repay some or all their debt in a few years. While this is a great option for some, it’s important to stay current on expenses and stick with the payment plan.

Problems with taxes oftentimes occur while individuals are juggling other aspects of the bankruptcy process. It’s vital that you are organized with taxes, especially in this situation. If tax issues surface, the IRS can intervene and have your bankruptcy case dismissed.

There are a few tips to avoid tax problems during Chapter 13 bankruptcy, which includes:

  • Acting fast. You want to file your tax returns in a timely manner. You should do this shortly after filing for bankruptcy. If your tax returns are late or missing, your case might be at risk. In the event you are unable to file your tax return, you should request an extension.
  • Consider lifestyle changes. Sometimes individuals sell their homes during Chapter 13 bankruptcy. It’s important to remember you can no longer deduct the interest on the mortgage. You can prepare for this change by withholding more taxes on your paycheck.
  • Obligations. Filing for bankruptcy might discharge some older income tax obligations. However, you need to consider priority tax obligations. These types of taxes don’t face elimination, so you should factor them into your repayment plan. Certain property taxes, payroll taxes and employment taxes are examples of such obligations.

An attorney can help you through your bankruptcy case. Sometimes it’s beneficial to file your taxes before you file bankruptcy. If you happen to receive a refund, avoid using the money to pay bills until the case is finalized. Filing your taxes on time each year is the best route.

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