by: Baran Bulkat, 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.)
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:
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:
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.
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.