Tax Debts in Chapter 13 Bankruptcy

Whether you can get rid of tax debts in Chapter 13 bankruptcy depends on whether it is a priority or nonpriority debt.

by: , Attorney

How a tax debt will be treated in Chapter 13 bankruptcy depends on whether it’s a priority or nonpriority tax obligation. Priority tax debts are not dischargeable in bankruptcy and you must pay them off in full through your Chapter 13 repayment plan. In contrast, nonpriority tax obligations are treated the same as your other general unsecured debts (such as credit cards and medical bills) and wiped out when you receive your discharge. (Learn more about how unsecured debts are treated in Chapter 13 bankruptcy.)

Priority Tax Obligations

Most taxes are considered priority debts in bankruptcy. This means that you can’t eliminate them simply by filing for bankruptcy and receiving a discharge. If you file for Chapter 13 bankruptcy, you must pay off your priority tax debts in full through your repayment plan.

While this may not sound ideal, Chapter 13 bankruptcy actually provides debtors a convenient and affordable way to pay their tax debts over a three to five year period. In addition, priority tax obligations can also help reduce the amount you would otherwise be required to pay towards your nonpriority unsecured debts through your plan.

The following are some of the most common priority tax debts you may have to pay back through your Chapter 13 plan:

  • recent income tax obligations that don’t meet the necessary requirements to be considered nonpriority (discussed below)
  • property taxes incurred within one year before filing for bankruptcy
  • taxes you were required to withhold or collect (such as payroll taxes)
  • certain excise taxes, employment taxes, and customs duties, and
  • penalties related to nondischargeable taxes.

Nonpriority Tax Obligations

If you have older income tax obligations, you may be able to discharge them in Chapter 13 bankruptcy if they qualify as nonpriority tax debts. If a tax debt is considered nonpriority, it will be treated just like your other nonpriority unsecured debts in bankruptcy.

This means that if some of your tax debts are nonpriority, you probably will not have to pay off your entire tax debt through your repayment plan. How much you must pay will depend on your income, expenses, assets, and bankruptcy exemptions. When you complete your plan, any remaining nonpriority taxes will be discharged along with your other general unsecured debts.

In general, an income tax debt will be considered nonpriority if:

  • the tax return was due at least three years before you filed your bankruptcy (including any extensions you received)
  • you filed the return at least two years prior to filing for bankruptcy
  • the IRS has not assessed your liability for the tax debt within the 240 days before you filed for bankruptcy (but be aware that this 240-day limit can be extended if you previously submitted an offer in compromise or filed for bankruptcy and caused the IRS to stop its collection efforts), and
  • you did not commit fraud or willful tax evasion.

Special Note for Tax Liens

Even if a tax debt is considered nonpriority, your discharge only wipes out your personal liability for the obligation. It doesn’t eliminate liens placed on your property as a result of your tax debt. This means that if a lien has been placed on your property for unpaid income or property taxes (even if they are considered dischargeable nonpriority tax debts), your discharge will not eliminate that lien.

Talk to a Bankruptcy Attorney

The interaction between bankruptcy and tax laws can be extremely complicated. In some cases, simply waiting to file your bankruptcy can turn a priority tax debt into a nonpriority obligation. For these reasons, if you want to file for bankruptcy to eliminate or reorganize your tax debts, consider talking to a knowledgeable bankruptcy attorney in your area first to learn about your options.

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