Chapter 13 and Taxes

Posted by Kevin on January 29, 2012 under Bankruptcy Blog | Be the First to Comment

One on the advantages of Chapter 13 is that you can extend payments on long term debt.  Section 1322 (b)(2) allows a debtor to modify the rights of holders of secured claims (collateralized claims) other than claims secured only by a security interest in the debtor’s principal residence.  Section 1322 (b) (5) allows the debtor to cure defaults and make periodic payments during plan on debts where the last payment on the debt is due after the last payment under a plan.

In a recent case, a Chapter 13 debtor proposed a plan where the IRS would be paid on its secured claims in equal monthly installments over a period of 15 years.  Ingenious concept, however, the IRS objected because the proposed payment period was greater than 5 years (which is a requirement of Section 1322) and the monthly payments were too small.

Both the bankruptcy court and the 5th Circuit sided with the IRS.  The 5th Cir stated that Section 1322 (b)(5) applies only to long term debts such as home mortgages whose original payment terms establish a final payment date after the conclusion of the Chapter 13 plan’s statutorily mandated term.  The 5th Circuit added that  tax obligations were due, in whole, on the date of assessment or at least on the date that the tax lien was filed.  Therefore, it is not akin to a long term debt.   Accordingly, the debtor had to make payment in full on the tax lien (with interest) during the 5 year term of the plan.

How do I feel about this ruling?  I believe the Courts were correct.  I also believe that debtor’s counsel was aggressively taking a shot at a longer term payment.  However, that does not mean that Chapter 13 does not give a debtor a benefit with a secured tax obligation.  Remember, the courts pointed out that absent bankruptcy, the obligation is due in full upon assessment.  And you know that when the IRS wants its money, it can be very aggressive with levies and other collection methods.   Chapter 13 lets you take that debt out over 60 months.  In reality, that is not such a bad deal.