Understanding the federal tax aspects of a Chapter 13 bankruptcy

Arizona residents may be interested in some information on Chapter 13 bankruptcy in general and how it deals with discharging federal taxes. The tax issues involved depend greatly on the particular circumstances of the person filing for bankruptcy and looking to discharge the debts.

A Chapter 13 bankruptcy allows those with regular income to enter into a payment plan with their creditors. Regular income can come from either an employer or from self-employment or sole proprietorship. These Chapter 13 plan payments are often lower than they would be outside of the bankruptcy. At the end of the plan period, the debts are discharged. In order to qualify for Chapter 13, the debtor must have filed their tax returns properly for the four years prior to their bankruptcy.

If the person seeking bankruptcy is doing so because of federal taxes that they owe, they may need to make some changes to their federal withholding and begin making estimated tax payments. The Chapter 13 bankruptcy may be able to discharge the federal tax debt, though this is not guaranteed. Whether or not there is a tax discharge depends on the person's specific circumstances. If there is a refund owed on federal taxes during the bankruptcy, the debtor may be eligible to receive it. The government may delay the payment of this refund or apply it to the taxes that are owed, though.

The tax and legal issues surrounding debt relief through Chapter 13 bankruptcy can be difficult to handle without the assistance of a professional. An attorney with experience in bankruptcy may be able to help the person with the initial filing and with the ongoing financial challenges that tax, home mortgage and credit card debt can bring. The attorney may also be useful in negotiating manageable payments with the various creditors.

Source: IRS, "Chapter 13 Bankruptcy – Voluntary Reorganization of Debt for Individuals", December 23, 2014

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