Filing for Chapter 13 bankruptcy can help manage overwhelming debt, but its impact on taxes depends on your situation. While it does not eliminate all tax liabilities, it can provide relief through structured repayment and protection from collection actions.
Tax debts in Chapter 13 bankruptcy
Certain tax debts can be included in a Chapter 13 repayment plan. Priority tax debts, such as recent income taxes owed to the IRS or New Jersey Division of Taxation, must be fully repaid over the plan’s three-to-five-year period. Older income tax debts that meet specific criteria may be discharged, reducing your overall burden.
Protection from tax collection
Once you file for Chapter 13, the automatic stay prevents tax authorities from garnishing wages, seizing assets, or placing liens on your property. This protection remains in place as long as you adhere to your repayment plan. However, it does not eliminate tax obligations that fall outside the plan or arise after filing.
Tax refunds and Chapter 13 bankruptcy
In many cases, the bankruptcy trustee may require you to contribute tax refunds toward your repayment plan. New Jersey filers may be able to adjust tax withholdings to minimize refunds and retain more income for necessary expenses. If you need a refund for essential costs, such as medical bills or home repairs, you can request an exemption from the court.
Filing taxes during bankruptcy
You must continue filing tax returns while in Chapter 13 bankruptcy. Failure to do so can result in case dismissal. Keeping up with tax obligations ensures that you remain compliant with the repayment plan and avoid complications with the IRS or state tax authorities.
Chapter 13 bankruptcy provides structured relief for tax debt, but it requires strict compliance. Understanding how it affects your taxes can help you plan effectively and maintain financial stability.
