If you have an outstanding payment when you file your tax return, you will be looking for a way to eliminate it. Can IRS debt be discharged in Chapter 13? There are cases where yes, so as not to inflict on the return regulations when your current financial status is not positive.
Chapter 13 bankruptcy is an option you can turn to when you have tax arrears and thus discharge past income tax debt. That doesn’t mean it will go away, and you won’t have to pay for it. On the contrary, it is a tool that allows you to create a payment schedule.
Paying taxes is an undisputed responsibility. Declaring bankruptcy when you have a tax debt does not mean you will be exempt from paying it. In cases where bankruptcy will help with the debt, however, you must understand Chapter 13 to know if it applies to you.
What Chapter 13 Bankruptcy Means
Chapter 13 is the alternative for people who have debt and can make controlled monthly payments on that debt. Accepting or entering Chapter 13 is to commit to a repayment plan of three to five years. This plan is pre-approved and monitored by the court.
If you want to opt for this exit, seek support from a professional who will explain the alternatives and answer if the IRS debt can be discharged in Chapter 13, depending on your case. So, with the professional, you should evaluate your specific situation and determine the use of this option.
When deciding to take this path to discharge the debt, you must keep in mind that this is a strict payment plan. After paying living expenses, you must promptly pay off the excess money to the debt. This means that will put costs and luxuries such as all-inclusive vacations on hold until the debt is paid off.
Chapter 13 represents tax debt relief because it can include certain types in the plan. In other words, the ISR can receive all, some or none of the debt, depending on these factors:
- Living expenses
- Other debts
- The value of exempt and non-exempt assets
Priority cases
In all cases, certain considerations are evaluated to determine if the debt is a priority. If it is, it must be paid in full; it cannot be discharged in a bankruptcy filing. If it is not a priority, it can be paid by completing the repayment plan.
The debt repayment plan is the total of taxes, unpaid interest and penalties you have incurred. It is important to get advice before taking the Chapter 13 option.
Filing for Chapter 13 bankruptcy is a powerful and helpful way to deal with tax debts. One of its advantages is paying current taxes without interest, reducing liens related to unpaid taxes, paying penalties, and discharging past tax debts completely.
The advantages of Chapter 13 vary according to each person or situation. If you qualify, it is best to forgo the tax benefits for the full relief proposed in Chapter 7.
What are priority and non-priority taxes?
Delinquent taxes must meet certain requirements before determining if they can discharge the IRS debt in Chapter 13. If there is a non-compliant portion, it must be paid in full within the three to five-year period. Priority taxes have the following aspects:
- Income or gross income taxes.
- Before filing bankruptcy, income taxes were due for at least three years (with valid extensions).
- You filed your income tax return at least two years before filing bankruptcy. By failing to file a timely return or the ISR makes a substitute return for you, some bankruptcy courts will hold that such taxes retain priority forever.
- The tax, recorded on the books as tax liability, is assessed by the taxing authority at least 240 days before you file your bankruptcy case.
- You have not committed fraud or willful evasion for the tax year.
- Sales taxes are collected from customers.
- Trust fund taxes: Medicare, FICA, Income Tax from an employee’s paycheck.
- Tax penalties for non-dischargeable taxes.
- Certain employment taxes, customs duties and excise taxes.
With the help of a bankruptcy attorney, you can determine the priority status of your taxes. It is always important to evaluate the debt status for the use of Chapter 13.
Secured Tax Debts
The agency will take steps to obtain interest on that property if you have a tax debt on a secured liability. That means that you will not be able to discharge the penalty because it applies measures such as:
- Taxes on a recent property: property taxes are secured by tax liens in most cases. Must pay any balance due in full within the Chapter 13 repayment plan. If there is no lien, it is a priority claim, as long as it was incurred in the year before the bankruptcy case filing. If you do not meet the time, it is a non-priority debt.
- Tax liens: If the amount of the debt is very high, the taxing authority has the right to file a lien to secure payment. Using Chapter 13, the person must pay the full tax lien amount within the plan’s stipulated time.
What are the benefits of using Chapter 13?
Chapter 13 bankruptcy helps people with tax debts, although it does not eliminate the amount owed. This tool provides benefits to tax debt; here are some of them:
- Discharge of old taxes and penalties.
- Create a realistic payment schedule.
- Eliminate tax liens.
- Quickly and economically resolve serious problems.
- No additional tax consequences, meaning that will pay no tax on the amount forgiven if a debt is discharged or not paid in full.
Remember that to include taxes in the bankruptcy plan, you must have your tax returns up to date, even if you have not made any payments. No matter your current financial situation, you must file your tax returns.
If you have unfiled back taxes, seek help from an attorney before beginning the Chapter 13 process.