When you have mounting debts, Chapter 13 bankruptcy can be a solution to help you establish a payment plan to pay off some of your creditors. But will the payment plan address all of your debt – or just some? What happens when you have tax debt? Can that be wiped out during the Chapter 13 bankruptcy proceedings?
It depends on how your tax debt is classified – as Priority Debt or Nonpriority Debt.
Chapter 13 Bankruptcy Basics
Chapter 13 is a common form of bankruptcy for individuals with a regular income. Under this type of bankruptcy, your debt and finances are reorganized under the supervision of the court and a court-approved trustee.
You will create a repayment plan to pay back your creditors within three to five years. Under most circumstances, this plan will provide a large payback to your creditors. If needed, it will use all of your disposable income for repayment.
If you have any questions about your tax debt and how to account for it in your repayment plan, it’s important to work with your Chapter 13 bankruptcy attorney.
Priority Tax Debts
In most cases, taxes are considered to be Priority Debts and cannot be eliminated through Chapter 13 bankruptcy. As a Priority Debt, it gets paid first before your other debts through your repayment plan. Some common tax debts you will need to repay through your plan include:
Recent income tax fees.
Any property taxes incurred within one year of filing bankruptcy.
Taxes you had to withhold or collect (this usually applies to payroll taxes).
Custom duties and excise taxes.
Penalties you incurred.
Even though you will need to repay your priority tax debts, you will be able to add them to your court-approved repayment plan. This will allow you to pay the debt over the three to five years of the plan.
Nonpriority Tax Debts
If you have older tax debts, then you might be able to discharge them through your Chapter 13 bankruptcy if they are considered to be Nonpriority Debts. In this case, your tax debt would get lumped in with your other Nonpriority Debt – which is typically your unsecured debt.
Some examples of Nonpriority Debts can include:
Credit card debt
The court-assigned trustee would then determine which debt gets paid off through your repayment plan, and any remaining debt can be discharged.
To be considered Nonpriority Debt, your tax debt will need to meet the following criteria:
The tax return was due at least three years before you filed for bankruptcy.
You filed the return at least two years before filing for bankruptcy.
The IRS didn’t assess your liability for the tax debt within the 240 days before you filed for bankruptcy.
You did not commit fraud or willful tax evasion.
You comply with your jurisdiction’s requirements.
If you are uncertain if you meet the criteria, it’s important to work with your bankruptcy attorney. Your lawyer can review your case and determine if you are eligible to classify your owed taxes as Nonpriority Debt. If you do not qualify, then you will need to proceed by treating your tax debt as Priority Debt.
Contact a Chapter 13 Bankruptcy Attorney
If you are sitting on tax debt and want to file for Chapter 13 bankruptcy, it’s crucial to hire an experienced attorney to help you through the process and determine what steps to take. There is a solution to getting creditors off your back while you restructure your finances to get out of debt – Chapter 13 bankruptcy. Don’t let debt ruin your life. Call (405) 529-9377 for a free case review.