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Chapter 13 and income taxes

One of the benefits of a Chapter 13 bankruptcy is that it can be used to pay down a federal tax debt over a period of three to five years without having to worry as much about other creditors and bills mounting. After all, a private settlement between a Massachusetts taxpayer and the IRS is not binding on other creditors, who may not be patient with the debtor.

If a Salem resident is going to use a Chapter 13 bankruptcy to pay down tax debt, he or she needs to keep a couple of things in mind. For one, the taxpayer must have filed all tax returns that were due four years or less prior to the date of filing bankruptcy. Also, he or she must keep filing tax returns while the bankruptcy payment plan is ongoing.

Furthermore, it is important for a debtor to remember that he or she must keep paying all taxes as they come due. Even if prior taxes are handled in the Chapter 13 repayment plan, going forward a debtor will be on their own to pay subsequent taxes in a timely fashion. In fact, failing to do so may not only lead to the IRS taking action on new tax debts but can also open the door for the IRS to challenge the bankruptcy in court.

It is therefore important for a Massachusetts debtor who is trying to get a fresh financial start to make sure, if he or she is employed, that all tax withholdings are properly adjusted. Debtors who are self-employed need to double check their income projections to make sure they set aside enough in their budgets for taxes. Of course, upcoming taxes can be accounted for in a Chapter 13 plan.

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