How Chapter 13 Really Works When You Owe Income Taxes

Reorganizing Tax Debts through a Chapter 13 Filing

As a general rule, most income tax obligations cannot be discharged in a Chapter 7 bankruptcy filing. You can, however, include tax debt in a Chapter 13 reorganization. When you do, you will propose a “Plan” that includes arrangements to repay or otherwise deal with your tax debts over 3 to 5 years. Just as important, you will have the benefit of the automatic stay, which prohibits the IRS, state treasury departments and other revenue agencies from calling, writing or taking legal action to collect a debt from you while the bankruptcy is underway. You can also challenge the amount claimed due as taxes in the “friendly” forum of a bankruptcy court, rather than a more distant “tax court”.

How It Works

When you include tax debt in a Chapter 13 reorganization filing, that debt will be classified either as priority debt or non-priority debt. Priority debts must be repaid in full as part of a reorganization plan, but non-priority debts need not be fully paid. Non-priority debts include most tax penalties. Older tax debts may also be non-priority. Since most tax debts cannot be discharged in Chapter 7, filing for protection under Chapter 13 will provide the added advantage of forcing the taxing authorities to accept payment out over a longer period of time at lower interest. If you file for Chapter 7, your tax debt will still be due in full after your discharge.

Priority tax debt includes:

  • Income taxes due under a timely filed non-fraudulent tax return which was last due over 3 years ago.
  • Any taxes you were required to collect or withhold, such as sales or use taxes, and income tax, employment taxes, Medicare and Social Security for employees
  • Excise taxes or customs duties

Even if the tax does not fit into this category, there may be tax liens against your property. These liens will remain if not satisfied or dealt with in bankruptcy. In a Chapter 13 case, it may be possible to substantially reduce the amount of these liens.

Tax issues in bankruptcy are complex and very fact specific. Qualified legal and tax advice is very important. We have helped many people obtain relief from taxes through bankruptcy.

Contact Neuner & Ventura, LLP

Let us help you take back control of your life! We understand the stress, anxiety and confusion that can be associated with a potential bankruptcy filing. We offer a free initial consultation to every new potential bankruptcy client. (We do, however, reserve the right to charge a fee to review any work done by another attorney). For an appointment, call Neuner & Ventura at (856) 596-2828 or send us an e-mail. Evening and weekend appointments are available upon request.

Representing Clients across South Jersey

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.

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