A Chapter 13 bankruptcy is a reorganization chapter. The debtor’s obligation to old creditors is measured by what’s left in the budget after paying current living expenses. If you can’t pay both this month’s cost of living and make the plan payment, you don’t qualify for Filing Chapter 13 Bankruptcy, your case will be dismissed or converted to chapter 7.
The Bankruptcy system is willing to protect you from existing creditors through a Chapter 13 if you complete your payment plan. But if you continue to live above your means, the system will wash its hands of you.
In trying to avoid filing for bankruptcy, many individuals decrease their tax withholding in an attempt to get more cash to pay debts. Of course, this often just ends up substituting the IRS for the credit card company as the most insistent creditor. Once a bankruptcy case is filed, the debtor needs to revisit their withholding and see if it will be adequate to pay the taxes that are due the following spring. If not, withholding needs to be increased. It’s not very smart to not pay your taxes and pay your creditors in bankruptcy is in your future anyway. Individuals in this situation should be honest with themselves and consult a bankruptcy attorney before they get themselves in tax trouble also.
Loss of the mortgage interest deduction when a property is sold, foreclosed or a lien is stripped can upset withholding that was perfectly proper under old facts. Debtors need to be mindful of the tax impact of changes in their lives and their holdings, and adjust withholding accordingly.