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Not paying taxes could turn Chapter 13 into Chapter 7

You filed for Chapter 13 bankruptcy because you’re still earning money, working as an independent contractor, and so you wanted to pay off your debt over three to five years instead of liquidating your assets. You like the idea of keeping what you own.

However, you neglected to put money aside to pay the IRS when income taxes come around again. Since you’re a contract worker, it’s never taken out of your paychecks.

What you should know is that a common bankruptcy provision says that you cannot fall behind on other debts while still paying off the Chapter 13 balance under court supervision. You can acquire debt — using a credit card, for instance — but you can’t have delinquent balances.

If you cannot pay your taxes, the court may define that as brand new debt. In some cases, they’ll then dismiss your Chapter 13 bankruptcy entirely. In other cases, they’ll just convert it to Chapter 7.

It should also be noted that you may face the same ramifications if you do not file your taxes at all.

The impact to you is significant, as you can imagine. Suddenly, to use bankruptcy at all, you now have to surrender assets. Your debt may all get liquidated at once, so you don’t have the three-to-five year obligation you did before, but you don’t get to keep everything you own. Since that’s specifically what you were trying to avoid, this is less than ideal.

If you decide to use bankruptcy, pay close attention to all stipulations, provisions and obligations. Make sure you understand exactly what you’re required to do and how the process works moving forward.

Source: Turbo Tax, “Filing Taxes After Filing for Bankruptcy,” accessed March 21, 2018

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