How Chapter 13 Bankruptcy Affects Joint Tax Returns In Texas

Takeaways:

Chapter 13 bankruptcy affects joint tax returns in several ways for Texans. Refunds may be directed into your repayment plan, joint liabilities remain shared, and timely filing each year avoids complications. While these rules can feel strict, working closely with an attorney helps.

Filing Chapter 13 bankruptcy in Austin, Texas, brings many changes, and tax season is no exception. How you and your spouse handle joint tax returns can look very different once a case is active.

For many couples, the interaction between bankruptcy and taxes is confusing. Refunds, debts, and filing requirements are all treated differently under Chapter 13, but with the right guidance, you can avoid surprises.

Overview Of Joint Tax Returns In Chapter 13

Tax returns play a unique role in bankruptcy cases, especially Chapter 13. When you file jointly with your spouse, the stakes can be even higher because both income and obligations are considered together.

Income Determines Your Repayment Plan

In Chapter 13, your repayment plan is based largely on household income. When spouses file jointly, the court looks at combined earnings to calculate disposable income. That number drives the monthly payment required under the plan.

Even if only one spouse files for bankruptcy, the non-filing spouse’s income may still be included for plan feasibility. It makes joint returns especially important because they reflect the full household picture.

Tax Refunds May Be Used

Many people are surprised to learn that tax refunds are often considered part of the bankruptcy estate. In Chapter 13, trustees may require refunds to be turned over and applied toward your repayment plan.

It can be frustrating if you rely on refunds for household needs, but it ensures creditors receive fair repayment.

Joint Liability Remains

If you and your spouse owe taxes jointly, bankruptcy won’t automatically erase that responsibility. You both remain liable for the debt. However, the repayment plan may include provisions for paying back owed taxes over time, easing the immediate burden.

Filing On Time Matters

Falling behind on tax filings during Chapter 13 is a serious problem. Trustees require timely returns each year to confirm income and ensure the plan remains feasible. Missing deadlines could jeopardize your case.

Tax season doesn’t pause just because you’re in bankruptcy. Knowing how joint returns interact with your plan helps you prepare, avoid surprises, and keep your case on track.

Ways To Handle Tax Refunds

Tax refunds often become a sticking point for couples in Chapter 13 bankruptcy. While it’s natural to view refunds as “extra money,” the bankruptcy system treats them as part of your repayment plan.

Refunds As Disposable Income

Trustees generally see refunds as disposable income, money above and beyond what’s for basic living expenses. Because of that, the court may require you to turn over all or part of your refund each year while your case is active.

Why Trustees Require Refunds

From the court’s perspective, Chapter 13 is about ensuring creditors get a fair share. If you consistently receive large refunds, the trustee may argue that your withholdings are too high and your plan payments should increase.

Possible Exceptions

Not every refund is taken in full. In some cases, you can keep part or all of it if the funds are for basic expenses. Examples include:

• Unexpected medical bills.
• Necessary car repairs.
• Household emergencies.

Your attorney can file a motion asking the court to allow you to keep the refund for these purposes.

Adjusting Withholdings

One way to avoid losing refunds is to adjust your tax withholdings. By taking home more of your paycheck throughout the year, you’ll have less of a refund at filing time and more stability in your monthly budget.

Tax refunds can make or break a household budget. By planning and knowing how refunds fit into Chapter 13, you’ll avoid surprises and make sure your repayment plan works smoothly.

Dealing With Joint Tax Debt

Owing taxes as a couple can be extra challenging, and Chapter 13 doesn’t automatically make that debt disappear. Still, the repayment plan offers a structured way to manage tax obligations without the chaos of IRS collection.

Joint Liability Stays In Place

When you file a joint return, both spouses remain equally responsible for the tax debt. Even if only one spouse files for bankruptcy, the IRS can still pursue the other spouse. Chapter 13 helps by rolling joint tax debt into the repayment plan, but it doesn’t remove your spouse’s liability.

Priority Vs. Nonpriority Tax Debt

Bankruptcy law separates tax debt into two categories:

• Priority tax debt: You must pay in full recent income taxes and certain other obligations through your plan.
• Nonpriority tax debt: Older taxes may be partially discharged after the plan ends.

This distinction matters because it determines how much of your tax debt survives after bankruptcy.

Stopping IRS Collections

Filing Chapter 13 puts the automatic stay into effect, which stops IRS collection efforts like wage garnishment, levies, and liens, at least while your case is active. This pause provides breathing room to deal with tax debt in an orderly way.

Benefits Of Including Taxes In The Plan

The biggest advantage is structure. Instead of juggling payments or fearing IRS enforcement, you make one monthly payment to the trustee, who distributes funds to creditors, including the IRS. It creates predictability and accountability.

For spouses in Texas facing joint tax debt, Chapter 13 doesn’t erase responsibility, but it makes repayment manageable. By bringing taxes into the plan, you reduce stress and keep your household budget more stable.

Steps To Take Each Tax Season

Tax season becomes more complicated when you’re in Chapter 13 bankruptcy. Following a clear process each year helps you stay compliant with the trustee and keeps your case on track.

1. File On Time

Late tax returns are one of the fastest ways to jeopardize your case. Trustees require timely filing to confirm your income and verify that your repayment plan is still feasible.

2. Keep Copies Of Returns

Always keep digital and paper copies of your returns. Your trustee may request them, and having copies ready avoids delays. It also helps your attorney quickly resolve any discrepancies.

3. Adjust Your Withholdings If Necessary

If you’re consistently receiving large refunds, consider adjusting your tax withholdings. Trustees may see refunds as disposable income, so reducing them keeps more money in your monthly budget instead of handing it over once a year.

4. Anticipate Refund Rules

Plan for the possibility that you need to turn over your refund. If you expect to need the money for essential expenses like car repairs or medical bills, let your attorney know so they can request permission for you to keep it.

5. Stay Current On Payments

Even during tax season, your regular Chapter 13 payments must continue. Don’t let tax obligations push your plan off track. Missing payments without approval risks dismissal.

6. Communicate With Your Attorney

Keep your Austin bankruptcy attorney in the loop. They can anticipate how refunds, debts, or new income from tax filings may affect your plan and advise you on the best way forward.

By treating tax season as part of your overall plan, you reduce stress and avoid costly mistakes. Preparation and communication keep your case moving smoothly toward discharge.

Legal Terms To Know In Chapter 13 & Taxes

Bankruptcy and tax law both come with a lot of technical language. Here are some important terms you’re likely to encounter and what they actually mean.

Knowing the language of bankruptcy and taxes makes it easier to follow what the trustee, IRS, or your attorney is explaining. You don’t need to memorize everything, but recognizing these terms gives you confidence in conversations about your case.

Getting A Reliable Bankruptcy Guidance

Chapter 13 bankruptcy can make tax season feel complicated, especially when joint returns and refunds are involved. The good news is that you don’t have to figure it out alone in Austin, Texas.

A bankruptcy attorney can guide you through reporting income, handling refunds, and staying compliant with trustee requirements. Having the right strategy makes the process far less stressful.

If you’re ready to get clarity, reach out to Austin Bankruptcy Lawyers, a Division of Kannon Moore Law. A free consultation can help you understand your options and move forward confidently.