Hidden Tax Deductions in Chapter 13 Bankruptcy: Don’t Leave Money on the Table
Tax season can be stressful under the best of circumstances—but if you’re in a Chapter 13 bankruptcy, it can feel even more confusing. Amid all the forms and financial records, there’s a little-known silver lining: some of your Chapter 13 plan payments may be tax-deductible. Unfortunately, many people—and even some tax professionals—overlook these potential deductions simply because they don’t know where to look or how to claim them.
At Wadhwani & Shanfeld, our Los Angeles Chapter 13 bankruptcy attorneys have walked thousands of Californians through the Chapter 13 bankruptcy process, and we know just how critical it is to maximize every financial opportunity available to you. So if you’re in an active Chapter 13 plan and making payments through a trustee, here’s what you need to know about identifying and claiming hidden tax deductions—especially when it comes to mortgage interest and other deductible expenses.
Mortgage Interest Hiding in Plain Sight
If your Chapter 13 plan includes catching up on past-due mortgage payments, there’s a good chance a portion of those payments is interest. And if you itemize your deductions, that mortgage interest is potentially tax-deductible—just like it would be outside of bankruptcy.
Here’s the twist: mortgage servicers often fail to issue a Form 1098 (the IRS form that reports mortgage interest) for payments made through a Chapter 13 trustee. Even though you’re technically paying the interest, and even though it’s going to your mortgage lender, the absence of a 1098 form can make it easy to miss this valuable deduction.
This doesn’t mean the deduction is off the table. It just means you need to be proactive in documenting the interest yourself.
Where to Find the Deduction
The key is in the records maintained by your Chapter 13 trustee. When you entered Chapter 13, you began making monthly plan payments, which the trustee disburses to creditors according to your court-approved plan. These disbursements are tracked and available online to you, typically through a secure portal provided by your trustee.
At your 341 meeting of creditors (a standard part of the bankruptcy process), you likely received instructions on how to access your case information. If you didn’t keep them, don’t worry—your bankruptcy attorney can help you retrieve this information or contact the trustee’s office directly.
Once logged in, navigate to the section that shows disbursements or payments made to your creditors. Find your mortgage lender’s claim—or the claim of the loan servicer, if different. This will show how much the trustee has paid them.
From there, you’ll need to:
- Identify the amount paid to the mortgage lender in the tax year in question.
- Determine how much of that total was interest.
This may require reviewing the lender’s proof of claim (filed early in the case) to see how much of your arrears were interest versus principal, fees, or escrow items.
Documenting the Deduction
Because your lender probably didn’t send a 1098 form for payments made through the trustee, you’ll need to create your own documentation to support the deduction if the IRS ever asks.
Here’s what you should save with your tax records:
- A copy of the lender’s proof of claim showing the breakdown of principal and interest owed.
- A printout of the trustee’s disbursement records showing how much was paid to the mortgage lender during the tax year.
- A copy of your Chapter 13 plan, which shows that payments toward mortgage arrears were part of your court-approved repayment strategy.
When your tax return is prepared, you can claim the mortgage interest deduction on Schedule A if you itemize, just as you would if you were making payments outside of bankruptcy. The IRS accepts deductions supported by credible documentation—even if no 1098 form was issued.
Other Deductible Payments Made by the Trustee
Mortgage interest isn’t the only hidden deduction that can appear in Chapter 13. Any deductible expense paid by the trustee on your behalf may potentially qualify, including:
- Property taxes included in mortgage arrears.
- Business expenses, if you’re self-employed and the trustee disbursed payments tied to your business operations.
- Income taxes repaid through the plan—though these are typically not deductible unless they represent interest or penalties.
As with mortgage interest, you’ll need to track and document these payments yourself. Remember, just because the money passed through the trustee doesn’t mean it wasn’t paid by you. The bankruptcy court views your plan payments as originating from your income, so payments made through your plan still count as your financial responsibility—and potentially as your tax deductions.
Talk to a Bankruptcy-Savvy Tax Professional
Because this area of tax law is highly specialized, it’s wise to work with a tax professional who understands bankruptcy. Not all CPAs are familiar with the Chapter 13 process, and many may not know where to find or how to validate deductions made through trustee disbursements.
If you’re already working with Wadhwani & Shanfeld for your bankruptcy, we’re happy to coordinate with your tax preparer or point you toward professionals who are well-versed in these issues.
Don’t Let Deductions Go to Waste
Every dollar counts when you’re trying to regain financial stability. Chapter 13 gives you the opportunity to repay what you owe over time and protect your assets, but it doesn’t have to come at the cost of losing out on tax benefits you’d otherwise have. By understanding how trustee payments can contain hidden deductions—especially mortgage interest—you can make sure you’re not leaving money on the table.
Contact Wadhwani & Shanfeld
If you’re in a Chapter 13 plan or considering filing for bankruptcy, now is the perfect time to understand how it affects your taxes. At Wadhwani & Shanfeld, we’ll help you not only get relief from overwhelming debt, but also ensure you’re maximizing the legal benefits available to you—including hidden tax deductions. Contact us today for a free consultation and let’s make sure every opportunity to strengthen your financial future is put to work for you.
Source:
bankruptcysoapbox.com/tax-deductions-in-bankruptcy
