Chapter 13 Bankruptcy and Filing Taxes: What You Need to Know

Filing for Chapter 13 bankruptcy is a powerful tool for managing debt, but it doesn’t put your tax responsibilities on hold. In fact, understanding how taxes work during Chapter 13 is crucial if you want to stay compliant and keep your bankruptcy plan on track.

In this guide, we’ll break down everything you need to know about Chapter 13 bankruptcy and filing taxes, including how to handle old tax debt, what to expect during your repayment plan, and how to avoid mistakes that could derail your case.

What Is Chapter 13 Bankruptcy?

Chapter 13 bankruptcy allows individuals with regular income to restructure their debt through a 3- to 5-year repayment plan. Unlike Chapter 7, you don’t have to liquidate assets. Instead, you make monthly payments to a bankruptcy trustee who distributes them to your creditors.

But what happens when you owe—or continue to owe—the IRS?

Do You Have to File Taxes During Chapter 13 Bankruptcy?

Yes. You must continue to file your tax returns each year while you’re in a Chapter 13 repayment plan. Failure to file can result in your bankruptcy case being dismissed.

The bankruptcy court and your trustee require you to stay current on tax filings to:

• Ensure your repayment plan is calculated correctly

• Determine if you owe priority tax debts

• Maintain eligibility for a discharge at the end of the plan

  
  

Tip: Missing tax filings is one of the most common reasons Chapter 13 cases get dismissed.

What Happens to Tax Debt in Chapter 13 Bankruptcy?

Not all tax debts are treated equally. Chapter 13 separates tax debts into two categories:

1. Priority Tax Debt

These include most recent income taxes, and they must be paid in full through your repayment plan. They usually include:

• Income taxes from the last 3 years

• Payroll taxes

• Fraudulent tax returns or unfiled taxes

2. Non-Priority Tax Debt

Older tax debt (typically over 3 years old), penalties, or interest may be classified as unsecured and may be:

• Paid at a reduced rate

• Discharged at the end of the plan (if eligible)

Whether a tax debt is dischargeable depends on multiple factors, such as how old it is, when it was assessed, and whether you filed on time.

Can You Receive a Tax Refund During Chapter 13?

That depends on your bankruptcy court and trustee. In many jurisdictions:

• You may be required to turn over all or part of your tax refunds to pay creditors.

• Some plans allow you to keep refunds for necessary expenses, but you may need court approval.

• In other cases, refunds are counted as disposable income and must be contributed to your plan.

Important: Do not spend your refund before checking with your bankruptcy attorney or trustee.

Filing Taxes While in Chapter 13: Best Practices

To stay compliant and avoid issues with the court or IRS, follow these best practices:

1. File On Time Every Year

Late filings can result in dismissal of your case. If you’re going to be late, notify your attorney immediately.

2. Keep Copies of All Returns

You may need to provide proof of filing to the trustee or court.

3. Report Refunds Honestly

Even if you expect to keep part of your refund, you must disclose it.

4. Consult Your Attorney Before Using Refunds

Spending without approval could violate your plan.

5. Stay Current on Post-Filing Taxes

Filing and paying your taxes moving forward is part of remaining eligible for a discharge.

Can Chapter 13 Help With IRS Collections?

Yes. Once you file for Chapter 13, the automatic stay goes into effect and stops:

• IRS wage garnishments

• Bank levies

• Collection calls

• Tax liens (in some cases)

  
  

While the IRS can still assess taxes during bankruptcy, they cannot attempt to collect without court approval.

What If You Can’t Afford to Pay Your Tax Debt?

Your tax debt is factored into your Chapter 13 plan based on your disposable income. If your financial situation changes, you may be able to:

• Modify your repayment plan

• Request a temporary suspension of payments

• Convert to Chapter 7 bankruptcy (if eligible)

Your attorney can help you explore options if you’re struggling to meet plan requirements.

Conclusion: Stay Proactive and Informed

Filing for Chapter 13 bankruptcy doesn’t eliminate your tax obligations, but it can give you time and structure to repay them without aggressive collection tactics. Staying compliant with tax filings is critical to the success of your case.

If you're unsure how to handle taxes during bankruptcy—or if tax debt is one of your biggest concerns—speak to an experienced bankruptcy attorney. The right legal advice can help you maximize your relief and avoid costly mistakes.

Frequently Asked Questions

1. Do I have to file taxes if I’m in Chapter 13 bankruptcy?

Yes, filing taxes each year is required. Failure to do so can result in your case being dismissed.

2. Will I lose my tax refund during Chapter 13?

Possibly. Many trustees require you to turn over your refund, though exceptions may apply.

3. Can Chapter 13 stop IRS wage garnishments?

Yes. The automatic stay stops most IRS collections, including wage garnishments and bank levies.

4. Are old tax debts dischargeable in Chapter 13?

Some are, depending on how old the debt is and whether it meets certain IRS criteria.

5. What happens if I owe new taxes during Chapter 13?

You are required to pay new taxes as they come due. Falling behind may jeopardize your case.