Your Income Tax Debt Paid through an “Asset Chapter 7 Case”

Posted by Kevin on October 17, 2016 under Bankruptcy Blog | Comments are off for this article

Here’s an unusual way of paying your income tax debt. The circumstances don’t line up very often, but when they do this procedure can work very nicely.

Generally, when filing a Chapter 7 “straight bankruptcy” a key goal is to keep everything that you own. You don’t want to surrender anything to the Chapter 7 trustee.

But sometimes you own something or a number of things that aren’t exempt. If so, one of your options may be to file a Chapter 13 case to protect your non-exempt asset(s). Almost always that option requires 3-5 years of payments.

If you don’t mind letting go of the non-exempt asset(s), a much quicker option is an “asset Chapter 7 case.” The bankruptcy trustee sells the non-exempt assets and uses the sale proceeds to pay your creditors.

What are the type of non-exempt assets that would fit into this scenario?  It’s not going to be your home.  (That is why we have Chapter 13)  But, say you recently closed down a business.  You may still own some of the business assets, but you have no use for them.  Or you may own a boat or an off-road vehicle that, for whatever reason, you no longer want to keep.  And you owe taxes that are otherwise non-dischargeable. That means the taxing authority will wait until the bankruptcy case is closed, and then start harassing you again for payment.

Under the Bankruptcy Code, in a Chapter 7, debts are paid according to a specific priority schedule.   Taxes have priority over credit card debt, medical debt, or the deficiency on a car loan after repossession.

But, what types of debts have priority over taxes?  The most important are the trustee commission and his/her professional fees.  This could amount to a few dollars.   Other than that, the most typical debts that have priority over taxes are unpaid child and spousal support.

So if you do not owe back support, then the trustee will pay your taxes after paying the trustee’s commission and professional fees to the extent funds are available.

Again, it’s not common that the “stars will line up”.   But when it does, it can be a big plus.  Also, this is not basic stuff so you will need an experienced bankruptcy attorney to navigate you through.