Tax Refunds, Tax Debt and Chapter 13 Bankruptcy

October 20, 2022 | By Steffens Law Office
Tax Refunds, Tax Debt and Chapter 13 Bankruptcy

Tax return season can create either a lot of stress or a time of excitement. Either you know you will have to cut a check to the IRS or you realize you are getting some money back to help with expenses you have pushed off. Either way, it is important to understand how filing a bankruptcy will impact your taxes and how tax debt affects your Chapter 13 bankruptcy payment.

All Your Tax Returns Need to Be Filed for Your Chapter 13 Bankruptcy to Be Successful

  • One of the main goals of a Chapter 13 bankruptcy is to get a payment plan approved by the court. To do so, you need to make sure all required tax returns have been filed.
  • If you have to file the bankruptcy before all your tax returns have been filed, you’ll need to file them as soon as possible to avoid complications and get your plan confirmed.
  • The best course of action is to file all returns before the bankruptcy is filed. That way, you’ll have a better idea if the debt will be erased and what your monthly plan payment will be.

tax return must be filed for chapter 13 bankruptcy to workI Owe Tax Debt to the IRS, Do I Have to Pay It?

  • There is not a simple yes or no answer, and it is best reviewed with your case manager and experienced bankruptcy attorney. It depends on the tax year and when the return was filed. 
  • Tax debt from the prior 3 tax years (and older if the return wasn’t filed at least 2 years before the bankruptcy is filed), must be paid from your chapter 13 plan payment. 
  • If the tax debt is more than 3 years old, and the return was filed on time, the debt is erased without payment.
  • If the return wasn’t filed before the bankruptcy is filed, tax debt over 3 years old won’t be re-paid in the bankruptcy, but it won’t be erased either.  You’ll have to file the return and pay the debt after the bankruptcy is over.
  • The good news is that the Chapter 13 will create a payment plan for the tax debt you do have to pay, so you don’t have to work on negotiating a payment with the IRS.

Will I Lose This Year’s Tax Refund Because I’ve Filed a Chapter 13?

  • No.  If you’ve filed a return and haven’t received the refund before the bankruptcy is filed, you won’t lose the refund because the Chapter 13 was filed.
  • If you’re owed a substantial refund that can’t be protected by your Nebraska bankruptcy exemptions, it might affect your monthly plan payment.  Don’t worry, we’ll review your options, and work to keep your payment affordable. 

I Usually Receive a Tax Refund.  How Does Bankruptcy Impact My Future Tax Refunds?

  • The Nebraska Chapter 13 Trustee doesn’t require filers to pay their future tax refunds to the trustee during the bankruptcy. We’ll review to confirm you aren’t “saving” for a large refund.  While it’s very rare, the Trustee may require you to  adjust your paycheck withholdings, so you don’t get a substantial refund every year.

Contact Steffens Law for Help Filing Chapter 13 Bankruptcy in Lincoln

At Steffens Law Office, our Lincoln bankruptcy attorneys have years of experience working on Chapter 13 cases, and we know how to work with the trustee and the IRS.  We don’t want these additional fears to get in the way of getting a fresh start and improving your financial situation. Contact our team online or call Steffens Law Office at (308) 872-8327 today! Our top bankruptcy attorneys would love to walk you through your questions and help get your finances back on track.