In many cases tax debts are non-dischargeable in a bankruptcy. Running up a tax debt and expecting to not have to pay it by filing for bankruptcy won’t work, so before you do anything that affects what you’ll owe Uncle Sam, make sure you consult with a credit expert or attorney. This is especially true when it comes to settling credit card debt for less than the total owed because the forgiven amount is taxable income.
Despite the limitations concerning tax debt and bankruptcy, there are instances in which bankruptcy will help with your tax debts. Filing for chapter 13 bankruptcy might actually be one of the most powerful tools you have for dealing with tax problems because it allows you to pay recent taxes interest free, discharge penalties, eliminate or reduce liens related to unpaid taxes, and discharge old tax debts entirely.
Of course, how much chapter 13 will help you overall varies from person to person, and in some cases, if you qualify, you might be better off foregoing the tax benefits for the relief complete discharge offers in chapter 7.
You and your attorney should review your specific situation and determine the best option for you.
What You Should Know about Chapter 13
Before you decide how to proceed, it’s a good idea to get a general overview for how chapter 13 bankruptcy works.
Chapter 13 is an option for those who are struggling with debt and who have a way in which to make controlled monthly payments toward that debt. Entering into chapter 13 means committing to a payment plan for three to five years that is approved by and overseen by the court.
Keep in mind the payment plan will be strict. Don’t expect to be spending on extravagant vacations and other luxuries while putting just a small portion of your income toward the payment plan. Instead, you’ll be committing to pay all of your excess money toward your debt once your living expenses are paid.
Chapter 13 helps with tax debt because certain types can be included in the payment plan. This means the IRS can end up getting all of the money they are owed, just a portion of it, or nothing, depending on a number of factors, including:
- Debtor’s living expenses
- Other debts
- Value of exempt and non-exempt property
There are also certain stipulations that determine whether or not a debt is considered a priority. This means it will need to be paid in full and cannot be discharged in a bankruptcy filing. If a tax debt is not a priority, it can be discharged upon the completion of the payment plan. This includes the taxes, the unpaid interest, and any penalties incurred.
To learn more about priority and non-priority tax debts, check out this information from Nolo.com.
Benefits of Using Chapter 13 to Deal with Tax Debts
Filing for chapter 13 bankruptcy can provide several benefits related to tax debts, including:
- Creating a realistic repayment schedule
- Discharging old taxes and penalties
- Removing tax liens
- Fast and affordable resolution to a serious problem
- No additional tax consequences – you won’t be taxed on the amount forgiven if a tax debt is discharged or not paid in full
One additional important detail:
In order for taxes to be included in a bankruptcy plan, you’ll need to have filed your tax returns, even if you did not make a payment. Any taxes more than three years old for which you did not file a return are non-dischargeable or a priority, with the exception of those assessed within the last 240 days before you filed for bankruptcy.
No matter your financial situation, make sure you file your tax returns, and if you have back taxes that haven’t been filed, talk to an attorney about filing before you begin the bankruptcy process.
If you’d like to discuss your tax debt and learn how bankruptcy could help or you have other questions about bankruptcy, contact the Law Office of Robert M. Geller at 813.254.5696.