Chapter 7 and Chapter 13 bankruptcy allows individuals the capability of relinquishing certain debts. Recent economic hardships have left many individuals with not only overwhelming personal debt, but also crippling tax debts. Though some tax debt cannot be completely discharged, Chapter 13 does allow certain taxes to be relinquished and others to be paid back over time.
Priority and Non-Priority Tax Debts
When deciding how to discharge tax debt, your bankruptcy attorney will help you determine which taxes are considered
priority or non-priority tax debts. First you must understand the difference between "secured" and "unsecured debts.
Secured debts are debts are backed up by collateral; this can include a car loan or mortgage. Unsecured debts are not backed up by collateral; these can include medical bills and credit card debts. Unsecured debts are separated into two categories, priority and non-priority. Since tax debts are considered unsecured, they are divided in this manner.
Priority Tax Debts
Though priority tax debts cannot be discharged by a Chapter 13, they will be attached to your payment plan so they can be paid over time. The court ruling on your payment plan for Chapter 13 supersedes the IRS decision to collect the debt as a lump sum. Therefore, the court ruling regarding your payment plan will include these taxes which will be paid back as a part of your payment plan along with other priority debts.
- Property Taxes: If the property tax was to be paid 1 year before you filed for bankruptcy, this liability is considered priority. If it was due prior to one year before filing for Chapter 13, it is considered non-priority.
- Withholding Taxes: These taxes are to be withheld from your employees pay, including FICA, Medicare, and income taxes. This also includes sales tax liabilities paid by your customers.
- Tax Liens: Even if this debt may be considered non-priority, the debt is classified under law as secured. This means this must be paid in full through the payment period associated with the Chapter 13.
Non-Priority Tax Debts
Though these debts will be considered unsecured, the court may require that you pay back a percentage of these tax debts. This percentage you will pay back will be significantly lower through filing for Chapter 13; they will also be a part of your monthly payment plan.
Income Tax: This debt must include federal and state
income tax debts but can also be the sum of tax from gross receipts.
- 240 Day Assessment: These taxes must have been assessed over 240 days prior to you filing for Chapter 13.
- Fraud: To qualify these debts, you must not have been convicted of tax fraud or intentional tax evasion.
Returns: The returns in which you owed the tax liability must be from three years before you filed for
For more information about how you can discharge your tax debt through bankruptcy, please contact the Law Office of James C. Shields. Our attorneys can help you file for bankruptcy so you can get your finances back on track.