While Chapter 13 can provide significant relief when you are struggling with unpaid business taxes, it is not as helpful as it used to be. You may have heard that certain tax debts which cannot be discharged in a Chapter 7 bankruptcy can be discharged in a Chapter 13 filing. This is no longer the case but there are still some benefits to a Chapter 13 when you are dealing with tax debt.
Before the last major bankruptcy law change, you could discharge certain taxes in a Chapter 13 even though those same taxes could not be discharged in a Chapter 7. You could do this as long as you paid as much as you were able through your Chapter 13 plan. This is no longer the case. The “super-discharge,” as it was commonly called, is no longer available. When it comes to the discharge of taxes, Chapter 7 and Chapter 13 are exactly the same. Any tax debt that cannot be discharged under Chapter 7, cannot be discharged in a Chapter 13.
But Chapter 13 still has significant benefits for dealing with taxes that cannot be discharged.
Using Chapter 13, you file a plan to pay your creditors over time. This includes tax creditors. Under a Chapter 13 plan, you may be able to extend the time for paying the tax debt over three to five years.
If a tax lien has not been filed, it may also be possible to stop the accrual of penalties and interest on the tax debt over the life of the Chapter 13 plan.
Another significant benefit is that you can keep your business. A Chapter 13 is a repayment plan, not a liquidation. If your business is doing well but you are struggling with tax debt from an earlier time period, you can keep the business running while you gain additional time to pay the tax.
If you can't save your business and the amount of your unsecured debt is above the maximum allowed to qualify for Chapter 13 (see Are You Eligible for Chapter 13?), you may be able to file what is commonly referred to as a "Chapter 20.”
In a "Chapter 20" bankruptcy, you file for Chapter 7 bankruptcy and discharge all or most of your unsecured debts, which brings your remaining nondischargeable debts (such as tax debts) under the Chapter 13 debt limit. Immediately afterward, you file a Chapter 13 bankruptcy -- which gives you more time to pay the debts that are not discharged, such as taxes. In this scenario, you will not be eligible for a discharge in the Chapter 13 but it will provide you with more time to pay. (To learn more, see Multiple Bankruptcy Filings: When Can You File Again?.)