Chapter 13 bankruptcy is an excellent tool to use when you fall behind on your taxes because it allows you to discharge (wipe out) old income tax debt. If you have tax debt you can’t discharge, Chapter 13 bankruptcy might give you a more favorable repayment schedule—meaning a lower monthly payment—than you would receive from the taxing authority.
Delinquent taxes must meet qualification requirements before getting 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, it's likely that you 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 will have to 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’re not going to 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.