Many types of taxes can be included in Chapter 13—IRS debt being the most common. Depending on the age, some IRS debt can be discharged in Chapter 13, and filers can repay other IRS debt in Chapter 13 through the monthly payment plan.
It's also possible to get property tax relief in bankruptcy. Learn how to clear IRS tax debt and property taxes in Chapter 13 by catching up on what you owe over time.
Chapter 13 bankruptcy can be an excellent tool when you fall behind on your taxes because it allows you to discharge (wipe out) old income tax debt. If you have tax debt or property tax you can't discharge, you'll pay it off in Chapter 13 bankruptcy, instead.
So why would you file for bankruptcy instead of agreeing to a payment plan with the IRS or another taxing authority? The Chapter 13 payment plan might give you a more favorable repayment schedule—meaning a lower monthly payment—than you would receive otherwise.
However, you might actually pay more in bankruptcy than you would otherwise. When comparing how much you'll pay, it's essential to compute interest and the Chapter 13 trustee's fee. The trustee's fee alone can be as high as 10%.
Delinquent taxes must meet qualification requirements before being discharged in a Chapter 13 case. Any portion failing to meet the requirements must be paid in full over the course of a three- to five-year payment plan. Here are examples of what will happen to different types of taxes in a Chapter 13 bankruptcy.
If the tax is on income or gross receipts, you'll start by determining whether it's a priority or nonpriority debt. Priority tax must be paid in full in the Chapter 13 plan. By contrast, nonpriority tax gets lumped with other unsecured debt (like credit cards and medical bills).
All nonpriority unsecured creditors must share your "discretionary income," or the amount remaining after deducting allowed living expenses and payments (such as your house and car payment). Because you pay only your discretionary income to this group, you likely won't have to pay all your nonpriority tax debt.
To learn more about how your plan payment is determined, visit Your Obligations Under a Chapter 13 Bankruptcy Plan.
Your taxes are nonpriority if they meet the following criteria:
If you don't meet the following, your tax will be considered a priority tax that must be paid in full in your Chapter 13 plan.
Recent income taxes aren't the only types of priority tax debt. Other taxes that must be paid in full through the Chapter 13 plan include:
A bankruptcy attorney can tell you the priority status of your tax, or, you can call the taxing agency and ask.
If your tax debt is a secured liability—meaning that the taxing agency took steps to gain an ownership interest in your property—then you won't be able to discharge the obligation. Here are two examples:
To learn about your other options for dealing with tax debt, see Back Taxes & Tax Debt.
Yes, in some cases. In most instances, the tax must be over three years old and meet other requirements. If your IRS tax debt qualifies for a discharge, it will be erased with other qualifying debt.
Because the requirements for discharging tax debt in Chapter 7 differ depending on the state, it's often simpler to call the IRS and ask whether you can discharge what you owe. However, you'll want to verify with a local bankruptcy lawyer before proceeding.
You can learn more about discharging tax obligations in bankruptcy by reading Tax Debts in Chapter 7 Bankruptcy.
Did you know Nolo has made the law accessible for over fifty years? It's true, and we want to ensure you find what you need. Below, you'll find more articles explaining how bankruptcy works. And don't forget that our bankruptcy homepage is the best place to start if you have other questions!
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