Understanding The Impact Of Chapter 13 Bankruptcy On Your Taxes & Tax Refunds

How Chapter 13 Bankruptcy Affects Your Tax Obligations, Refunds & Repayment Plan in Hawaii

If you have filed for Chapter 13 bankruptcy, you may be unsure on how it will affect your taxes. Especially when it comes to a tax refund. Most people look forward to their tax refund and have plans for it. Some like spending it on something fun, others pay off bills, and still others put it towards a car purchase. 

However, when it comes to Chapter 13 bankruptcy, your tax refund will be handled a little differently than normal. It’s important that you’re aware of how your tax refund will be used as well as other tax-related information when filing for bankruptcy. The good news is a Honolulu bankruptcy attorney will make sure you understand how your taxes will be affected so you can go into it with confidence. 

Tax Obligations During Your Chapter 13 Bankruptcy Plan

According to the IRS, the tax obligations for taxpayers who file Chapter 13 bankruptcy does not change much. During your bankruptcy plan, you will be required to file taxes as usual every year, or get an extension. 

Not only do you have to file all the required tax returns for the years during your bankruptcy, but you must be current on all tax returns from four years before filing for bankruptcy. If the previous four years are not filed, you may be at risk for having your case dismissed.

Once tax returns are filed, you will be required to pay owed taxes as they become due. If you have tax debt and are struggling to keep on top of taxes, there are some options that a bankruptcy attorney can walk you through and your tax debt will likely become a part of your bankruptcy repayment plan. 

Chapter 13 Repayment Plans & Tax Debts

If you have filed for bankruptcy because you were unable to keep up on your debts, it is possible that you have some tax debt. Tax debt is not dismissable under Chapter 13 bankruptcy, and you will be required to pay it in full by the end of your repayment plan. That said, your bankruptcy attorney and the assigned trustee will work your tax debt into your repayment plan in a way that is feasible for you to handle.

There are several types of tax debts that you will be required to pay including:

• Income taxes for which the return was due within three years before the bankruptcy filing.
• Taxes assessed within 240 days before filing for bankruptcy
• Taxes not yet assessed but assessable after bankruptcy is filed.
• Property taxes that became due within one year before bankruptcy
• Certain employment taxes

What Happens to Tax Refunds Under Chapter 13 Bankruptcy?

Within the process of filing for bankruptcy, you, your bankruptcy attorney, and the bankruptcy trustee will calculate all of your everyday living expenses. These expenses include:

• Housing and Utilities
• Food and Groceries
• Transportation
• Healthcare
• Personal and Household Needs
• Insurance
• Childcare and Education
• Taxes

Once your living expenses are calculated, the rest of your income will be called ‘disposable income’ and will be taken by the trustee to make payments on the repayment plan. If you get a tax refund, more than likely it will be labeled ‘disposable income’ as well and taken by the trustee. However, there are some ways to get your tax return excused so you can keep it and use it for something else.

Getting a Tax Return &  Keeping It Under Chapter 13 Bankruptcy

For the most part, you will not be able to keep your tax return if you are under a bankruptcy plan. That said, there can be exceptions. If you believe you need the money for something, you will be able to petition to the bankruptcy court. 

The only reasons that a bankruptcy trustee or court will allow you to keep your tax return are for something that is truly needed, as well as unexpected. For instance, if you have medical expenses or your vehicle needs to be repaired, these are instances that you could not have expected when setting up your bankruptcy plan, and they fall under everyday-living necessities. 

However, if you are falling behind on bills or other types of everyday expenses, the court will likely want to evaluate if your bankruptcy plan is even feasible for you and you will not be allowed to use the tax return to catch up on those payments. 

Relieve Stress & Anxiety When It Comes to Taxes & Your Chapter 13 Bankruptcy Plan With Our Bankruptcy Attorneys!

Filing for bankruptcy is a stressful process that requires a lot of information from you as well as requires you to understand a lot. Have peace of mind in the bankruptcy process with our Honolulu bankruptcy attorneys from Blake Goodman by your side. We will help you start over financially and settle your debts with confidence.

With understanding and compassion, let us be your go-to bankruptcy attorneys in Hawaii. Contact us today!