For people who have a source of income, Chapter 13 bankruptcy can offer an escape from overwhelming debt. This type of bankruptcy, sometimes called “wage earner’s bankruptcy,” is available only to people who have a job, are self-employed, or own a business as a sole proprietor.
During the three to five years it takes to pay off debts under Chapter 13, you should be aware of your tax obligations.
You still need to file returns and pay taxes
You must continue filing returns as normal during Chapter 13 bankruptcy. If you owe taxes, you should pay them when they are due. If you do not file your returns or pay your taxes on time, the court may dismiss your Chapter 13 case or convert your bankruptcy to Chapter 7.
You might not receive your complete tax refund
Federal tax debt generally falls into the category of priority debt, which you must pay first and in full under Chapter 13. If you owe federal taxes, the IRS may withhold all or part of your tax refund to pay the debt.
You may need to change your payments or withholding
If you have federal tax debt, you might need to increase the amount you pay throughout the year through estimated quarterly payments or withholding. Use the resources available through the IRS to estimate withholding to ensure that you pay the proper amount.
Chapter 13 bankruptcy can help you free yourself from severe debt. When you file Chapter 13, you must be prepared to take responsibility for your finances and make timely payments.