Reorganizing debts through Chapter 13 bankruptcy

In Minnesota, a Chapter 13 bankruptcy may be used to help debtors voluntarily reorganize their debts. This allows people to shrink their monthly payments and develop a plan to have the debts paid in full in a matter of just a few years. In addition to addressing concerns about credit card balances and other unsecured debts, a Chapter 13 may also be used to address amounts owed for federal income taxes. However, there are key limitations and requirements that people attempting to file should be aware of.

This is only open to wage-earners, sole proprietors of small businesses and the self-employed. A regular income is required to ensure that the individual will have the necessary funds to make payments in a timely manner. Additionally, people must be able to show that they've filed tax returns for the four years leading up to filing for bankruptcy.

When an individual is going through a bankruptcy, there may be special considerations where tax refunds are concerned. If a balance owed towards taxes has contributed to the bankruptcy, then the tax withholding should be reviewed and possibly increased to avoid a problem moving forward. In the event that there is a tax refund owed to the individual, the refund may be used to pay down existing tax debts.

People who have questions about their tax returns and filing bankruptcy on existing tax debts are encouraged to speak with a bankruptcy professional. While the IRS has agents on hand to answer these questions and provide consumers with information regarding the law, these customer service representatives ultimately are not looking out for the best interests of the debtor. An attorney, on the other hand, may provide debtors with information on how to reorganize debt, possibly lower their amount owed and protect their best interests moving forward.

Source: IRS, "Chapter 13 Bankruptcy – Voluntary Reorganization of Debt for Individuals", December 23, 2014

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