Use Chapter 7 or Chapter 13 to Resolve Your Tax Debts from a Closed or About-to-Close Business

Posted by on August 15, 2015 under Bankruptcy Blog | Comments are off for this article

If you had struggled to keep a business open, but have decided to throw in the towel, there’s a good chance you owe taxes. Here’s how to deal with them.

The Basic Choice

Let’s assume that you are seriously considering filing bankruptcy, but want to know your options.

You have two choices within bankruptcy for addressing tax debts after closing down a small business:

1. File a Chapter 7 case to discharge (legally write-off) all the debt that you can, which may include some of your tax debt, and then deal directly with the IRS and any other tax authorities to either pay the rest of the taxes in monthly installment payments or to negotiate a settlement (called an Offer in Compromise in the case of the IRS).

2. File a Chapter 13 case to deal with all your debts, which again may include the discharge of some of your tax debt, while you pay the rest of the taxes through a court-approved Chapter 13 plan, and being protected throughout the process from collection actions by the IRS and any other tax authorities.

Putting aside the many factors distinct from taxes, choosing between Chapter 7 or 13 comes down to this key question: Would the amount of tax that you would still owe after completing a Chapter 7 case be small enough so that you could reliably make reasonable payments to the Internal Revenue Service (or other tax authority) which would satisfy that obligation within a sensible time period?

Answering that Question

The idea is that Chapter 7 is likely the way to go if you don’t need the long-term protection that comes with Chapter 13. In a Chapter 7 case, once that case is completed—usually only about three to four months after it is filed—the IRS/state can resume collection activity on the taxes that were not discharged in bankruptcy. You clearly want to avoid that. So a Chapter 7 makes sense ONLY IF before any collection activity begins you have arranged with the IRS/state to make payments, and 1) those payments are reasonable in amount, 2) your circumstances are stable enough so that you are confident that you will be able to pay them consistently, and 3) the length of time you would be making payments does not stretch out so long that the interest and penalties get too high.

Your attorney will be able to tell you—usually with high reliability—which tax debts will and will not be discharged in a Chapter 7 case, and thus how much in taxes you still owe. Then the next step is determining what the IRS/state would require you to pay in monthly payments, or possibly would accept in settlement. Your bankruptcy attorney may be able to give you guidance about this, or may need to refer you to a tax  specialist (usually an accountant). Once you know the likely monthly installment payment amount—assuming you go that route—then you need to seriously consider whether that would be an amount you could reliably, reasonably pay, without incurring too much in interest and penalties before you paid it off.

If so, Chapter 7 likely is more appropriate. If not, then Chapter 13 is likely better because it gives you much more protection.

The “Automatic Stay” Applied to the IRS

Posted by on August 11, 2015 under Bankruptcy Blog | Comments are off for this article

The IRS is just another creditor that you can get immediate protection from by filing bankruptcy. With some exceptions.

The “Automatic Stay”

The filing of a bankruptcy case—either Chapter 7 or 13—triggers one of the most powerful tools of bankruptcy—the “automatic stay.” That’s the aggressively protective law that goes into effect 1) automatically the instant your bankruptcy case is filed at court 2) to stay—which means stop—all collection activity against you and against any of your assets.

The Bankruptcy Code includes a list of what creditors cannot do because of the “automatic stay.” Here are some of them (focusing on those readily applicable to the IRS):

• start or continue a lawsuit or administrative proceeding to recover a debt you owe
• take possession or exercise control over property you own as of the time your bankruptcy is filed
• create or enforce a lien against such property
• collect by any means any debt that existed before the bankruptcy filing

Applied to the IRS

The IRS and similar state agencies are certainly not treated like your conventional creditors when it comes to the discharge (legal write-off) of your debts. But in most respects they ARE treated the same for purposes of the “automatic stay.”

The Bankruptcy Code says that the “automatic stay” “operates as a stay, applicable to all entities.” (11 U.S.C. Section 362 (a).)  Is the IRS an “entity”? The Code explicitly defines that term to include “governmental unit.” (Section 101(15).) So the IRS and all tax collecting “governmental units” are governed by the “automatic stay.”

What If the IRS Still Tries to Collect

Just like any other creditor, the IRS can get slapped pretty hard if it violates the “automatic stay” by continuing to collect on a debt or taking any other of the forbidden actions. If you are
“injured by any willful violation of [the automatic] stay… [you] shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages” against the IRS. (Section 362(k).) Indeed on occasion the IRS HAS been slapped hard. It now tends to follow the law and respect the “automatic stay” quite faithfully.

Special Exceptions to the “Automatic Stay” for “Governmental Units”

The IRS and state tax agencies do have some specialized exceptions—things they can continue doing in spite of your bankruptcy filing. (Section 362(b)(9).) But these are sensible exceptions that apply more to the determination of amount of a tax debt than to its actual collection. These tax agencies can demand that you file your tax returns, can make an assessment of the tax and tell you how much you owe, and can do an audit to figure out the amount you owe. They cannot create a tax lien or take any other collection action.