Chapter 13 to Manage Tax Arrearages

Managing Tax Debt with a Chapter 13 Plan

IRS buldingAs a general rule, a bankruptcy discharge will not remove personal liability for most tax debts. See our previous blog post on that subject. Generally, taxes that are non-dischargeable are also entitled to a priority in payment in Chapter 13, and must be paid in full over time under an approved Chapter 13 plan. Those debts that are not “priority debt” will be discharged with the same right to payment as other “non-priority, unsecured debt” such as credit cards. That debt will be pooled with other similarly situated debt, such as medical expenses and credit card debt, and the amount of payments on those debts depends on a number of factors, including how much income is available after priority and secured debt have been paid. Often, these debts are only partially paid, with any amounts still upon completion of all plan payments being discharged.

Tax Liens may be subject to “cram down”

Taxing authorities such as the IRS and states such as New Jersey will obtain tax liens by various means. For the IRS to have a valid enforceable lien in a New Jersey bankruptcy, it must file a Notice of Tax Lien in the county where you own real estate, or where you reside or where a business has its principal place of business. Unless modified, these liens must either be satisfied or remain undisturbed in a Chapter 13 bankruptcy. This would mean that the lien is still attached to real estate or other property when the bankruptcy is over.

However, under a procedure called “cram-down” a tax lien can be reduced to the value of all property to which it attaches, and if that amount is paid, can be removed at the end of a case. For example, if John has $120,000.00 in IRS liens, but the total value of everything he owns, (including profit sharing plans) is only $50,000.00, then he is permitted to pay only $50,000.00 and upon paying that amount to the IRS in his Chapter 13 plan, the lien will be discharged and removed.

Taxes are complex and specialized advice is needed. IRS CIRCULAR 230 DISCLOSURE: Pursuant to Treasury Regulations, any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used or relied upon by you or any other person, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any tax advice addressed herein.

Contact Neuner & Ventura, LLP

At Neuner & Ventura, LLP, we know that the bankruptcy process can be intimidating and confusing. We offer a free initial consultation to every client. For an appointment, call our office at (856) 596-2828 or send us an e-mail. We do, however, reserve the right to charge a fee to review any work done by another attorney. Evening and weekend appointments are available upon request.

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