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Federal taxes and bankruptcy considerations

When Virginia residents are struggling to pay their debts and keep up with bills, they may find relief with a Chapter 13 bankruptcy. The bankruptcy codes have specific guidelines regarding filing requirements and eligibility. In addition to having some form of regular income, people must also be able to show that they've filed tax returns for each of the last four years.

People who are filing for bankruptcy are advised to avoid incurring any additional debt. If someone owes federal tax debts, then they should have their withholdings reviewed and possibly increased to avoid incurring a larger debt in this area. A bankruptcy that is in process may also have an impact on federal tax returns. While people are still eligible to receive returns for money they are owed, the funds may be used to pay down any existing tax debt.

Once the bankruptcy moves through all the necessary steps and is successfully completed, the debtor will receive a discharge of debt. This shows that the debtor is no longer responsible for the debts listed in the bankruptcy. Not all debts may be eligible for bankruptcy, so debtors are urged to meet with a professional to learn more about what can be written off or restructured to provide financial relief and a fresh start.

When filing bankruptcy, people should start by consulting with an attorney to discuss their options and responsibilities. This allows debtors to make more informed decisions regarding their finances and decide whether bankruptcy is the right decision. In many cases, a benefit of starting the bankruptcy process is that the attorney can then stop creditor harassment. The IRS also has professionals available to answer general questions about how a bankruptcy affects taxes.

Source: IRS, "Chapter 13 Bankruptcy – Voluntary Reorganization of Debt for Individuals", December 21, 2014

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