Chapter 13 repayment plans in bankruptcy can be very helpful in getting you back on your feet. However, most plans never make it to completion because over three to five years, "stuff happens."
Sometimes it is a job loss, cut in pay, or the birth of a new child that can interfere with your ability to make the payments. Oftentimes there are ways to address this through a plan modification, but some problems can be avoided in advance through proper planning.
Don't Underdeduct for Tax Withholdings
One thing you should never mess with are tax withholdings from your pay. When you are in a chapter 13 plan, your paycheck deductions need to be as close to your actual tax liability as possible, if not a little over (a refund in the spring is better than a bill).
This is to prevent you from getting a big tax bill from Uncle Sam that is not addressed by the bankruptcy and that can interfere with your making your plan payment. There is a very good article on this at the Bankruptcy Law Network that is worth a read.
Don't Overdeduct Either
The opposite is also true. Although a refund is better than a bill, too big a refund every year is an indication that you are having too much deducted from your pay. Uncle Sam isn't your bank on a savings account, and you get no interest on a refund.
You are better off lowering deductions and increasing net income every pay period, so as to better afford monthly expenses and your plan payment.
So What Do I Do?
If you are contemplating a chapter 13 bankruptcy, be sure to consult with a tax professional to see if you need to file a new W4. This "ounce of prevention" is worth the effort and can help to insure the best possible outcome for your plan.
If you live in southern New Jersey and are considering filing bankruptcy, please feel free to call me at 856-432-4113 or contact me through this site for a free consultation in my Woodbury office to discuss your case.
If you are looking for more information about bankruptcy, then download my free book,Top Questions People Ask About Filing Bankruptcy in New Jersey.