Tax Refunds in a Chapter 13 Bankruptcy Case

Some debtors look forward to tax time because that is the time that they receive large tax refunds from the IRS.  Instead of receiving their fair share of monthly earnings, these taxpayers believe that their savings would be better off in the hands of government.  Meanwhile many of these same workers are struggling to pay their monthly expenses.  In a chapter 13 bankruptcy, tax refunds are factored into determining how much a debtor can afford to pay creditors.  Essentially, tax refunds are considered disposable income unless some further explanation is provided to the chapter 13 trustee.  The problem is that the loss of these hard earned funds can offset the whole point of a reorganization, to give the debtor a fresh start.

Monthly Earnings Should be Available on an Immediate Basis in Bankruptcy

Taxpayers that are overwithholding can still make adjustments to their withholdings in the middle of the year.  Doing so will make more wages available to a debtor for household expenses and other necessary costs of living.  In turn a debtor's annual tax refunds will be much lower.  And if the amount of the annual refund is less than $1,000-$2,000, most trustees will consider allowing a debtor to keep the funds.  Overall this kind of change makes keeping up with monthly chapter 13 payments and monthly living expenses easier.

Chapter 13 Bankruptcy Encourages Debtors to Track Spending

In a sort of renaissance style chapter 13 participants need to reexamine their spending habits. Many begin this makeover for the first time in their lives and are glad that they finally do it.  That is because you can't possible meet all of your obligations if you don't know what you are spending your money on.  Once you start checking in on the categories that are costing you the most you can take control of your wealth building ability.  Paying down debt and making sure that you have money available for health care, car and home maintenance, and clothing, can go a long way to keeping you on a steady financial path. Budgeting during bankruptcy is something that an Elk Grove Bankruptcy Attorney can help a debtor prepare for.

Filing Tax Returns on Time in Chapter 13 Bankruptcy

Since the IRS needs to ensure that you are not falling behind while you are in chapter 13 its a good idea to timely file returns.  Otherwise your debt problem can be compounded by further debt.  The taxing authorities do not have to wait on seeking payment from debtors that incur post petition tax debt.  By reviewing and filing taxes early in the year, a debtor has the opportunity to plan and pay for any extra taxes that are due.

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