Usually debtors in chapter 13 New York bankruptcy concern themselves with what happens to their tax refunds, which trustees will keep for the creditors, but there’s another way the tax code intersects with bankruptcy—but this time to the advantage of debtors: deductions.
The reason tax deductions can make a difference for debtors in chapter 13 is that the trustee acts as the debtor’s agent when making payments to the creditors. Consequently, any deductions debtors would normally be able to take outside of bankruptcy based on payments made to those creditors can be claimed when the trustee is making those same payments on their behalves. Here are some examples:
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Home mortgage interest. The tax code allows debtors to deduct home mortgage interest payments to mortgagee creditors. In chapter 13, these payments often take on a special dimension because debtors who have fallen behind on their mortgages are paying arrearages, much of which is unpaid interest, to the mortgage lender. These can be deducted from debtors’ income taxes to save money.
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State and local taxes. Tax debts are priority claims that are difficult but not impossible to discharge. This means they will be paid out of the repayment plan. They are, however, just as deductible in bankruptcy as they are out of it, and debtors can plan accordingly.
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Student loan interest. In contrast with tax debts, student loans are non-priority claims, but as with mortgages, any arrearages on a delinquent student loan will contain significant interest amounts. Because the tax code allows deductions for student loan interest, debtors can treat student loans the same way as home mortgage interest.
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Business expenses. Debtors with failed businesses can often find deductions for their costs and claim them too.
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Medical debts. Sometimes if a debtor is not reimbursed for a payment for medical care, they can claim a tax deduction. Therefore, the same logic in the above cases applies to medical debts in chapter 13.
Calculating the amount of the deduction isn’t always easy. Many times, lenders, particularly mortgage companies, do not send 1099 forms to the trustee in a debtor’s chapter 13 case. Debtors may have to scrounge the trustee’s Web site to see payments made to each lender to determine how much was paid on each claim in the tax year. Combining this information with the lender’s proof of claim and a copy of the plan might convince the IRS that you are entitled to the deductions.
Alternatively, you can consult with an experienced New York bankruptcy lawyer to help you out.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Chapter 13 Bankruptcy Lawyer Brooklyn NY Bruce Weiner for a free initial consultation.