Decreasing Your Tax Withholdings Could Jeopardize Your Chapter 13 Bankruptcy

Incorrect Tax Withholdings During Bankruptcy

When debtors are faced with increasing bills and a decreasing salary one of the first things some do is decrease their IRS tax withholdings so that their paycheck shows just a little more income. Fear, panic and the pressing need for cash can cause a debtor to decrease their tax withholdings so much that at the end of the year they actually owe taxes. More often than not, the debtor cannot afford to pay off the tax debt immediately and may end up with fees, penalties and interest added to their tax bill. Not only that, if the debtor decides to file Chapter 13 bankruptcy , having the incorrect tax withholdings during their bankruptcy could create a scenario where their bankruptcy case is in jeopardy.

Let’s Take a Look at the Facts

  1. Chapter 13 bankruptcy is designed so that debtors who have difficult to pay debt can repay that debt over the course of 3 to 5 years. The debtor’s debts can include tax debt, even if it is tax debt created by have the incorrect tax withholdings.
  2. While a Chapter 13 bankruptcy will allow the debtor to include tax debt, the problem comes when the debtor creates more debt after they have entered into a repayment plan. For example, let’s say that you filed Chapter 13 bankruptcy and were one year into making payments. Before filing bankruptcy you decreased your tax withholding so that you could have more cash in your paycheck and didn’t change the withholding amount after filing bankruptcy, of course once you file your taxes while in Chapter 13 bankruptcy you may owe taxes to the IRS or local tax agencies. If you are unable to repay the tax debt immediately you could end up creating new debt in your Chapter 13 bankruptcy plan and that’s where your problems could begin.
  3. The changes to the bankruptcy code in 2005 made failing to file your taxes in a timely manner or asking for an extension grounds for dismissal of the bankruptcy case.

Adding new tax debt could also create a situation where your bankruptcy case could be dismissed. Please talk to your bankruptcy attorney if you suspect that you will owe taxes for any tax period during your Chapter 13 bankruptcy so that he/she can create a solution and protect your case from dismissal.

Have Any Questions About IRS Taxes and Bankruptcy? Let us Know

If you have any questions about taxes and the bankruptcy process we are always available to answer any questions you may have. Feel free to call us of fill out our contact form to set up a free consultation.