Posted by Kevin on July 29, 2020 under Bankruptcy Blog | 
In the last blog, we discussed the advantages of paying priority debts through a Chapter 13 “adjustment of debts” case. We referred to recent income taxes as one of the most important kinds of priority debt. Today we show how Chapter 13 can greatly help you take care of recent income tax debts.
Recent Income Taxes Can’t Be Discharged
The law treats some, usually more recent, income tax debts very differently than other, usually older, income tax debts. Generally, new income taxes are “priority” debts and can’t be discharged (written off) in bankruptcy.
There are two major conditions determining whether a tax debt can be discharged. (There are other conditions but they are not very common so we don’t address them here.) Bankruptcy does NOT discharge an income tax debt:
1. if the tax return for that tax debt was legally due less than 3 years before you file your bankruptcy case (after adding the time for any tax return-filing extensions) U.S. Bankruptcy Code Section 507(a)(8)(A)(i).
OR
2. if you actually submitted the tax return to the IRS/state less than 2 years before you file the bankruptcy case. Bankruptcy Code Section 523(a)(1)(B)(ii).
Two Examples
Assume you filed a bankruptcy case on December 10, 2019. You owe income taxes for the 2017 tax year. The tax return for that tax was due on April 17, 2018 (because of a weekend and holiday). (This assumes no tax return filing extension.) That’s much less than 3 years before the December 1, 2019 bankruptcy filing date. So, no discharge of the 2017 tax debt, because of the first 3-year condition above.
As for the second condition above, assume again that you filed your bankruptcy case on December 10, 2019. This time change the facts so that you submitted the tax return late for the 2015 taxes, on October 1, 2018. That’s less than two years before the December 10, 2019 bankruptcy filing date. So because of the second condition above, taxes due for 2015 would not get discharged in bankruptcy
Meeting either of the two conditions makes the tax debt not dischargeable. In the second example immediately above, more than 3 years had passed since the deadline to submit the tax return. (The 2015 tax return was due on or about April 15, 2016.) But less than two years had passed since the actual submission of the tax return. So, no discharge of the tax debt.
With no discharge, you would have to pay that income tax debt after finishing a Chapter 7 case. But there are advantages of paying this priority debt in a Chapter 13 case.
Advantages of Paying Priority Income Tax Debts in Chapter 13
Under Chapter 13:
- You are protected from aggressive collection by the IRS/state not for 3-4 months as in Chapter 7 but rather 3-5 years.
- This includes preventing any new recorded tax liens, and getting out of any installment payment plans.
- The amount you pay monthly to all your creditors, including the priority tax, is based on your actual budget. It’s not based on often arbitrary requirements of the IRS/state.
- The amount your priority tax gets paid each month (if any) among your other debts is flexible. You do have to pay all of the priority tax debt(s) by the time you finish your Chapter 13 case. That’s up to a maximum 5 years. But other more urgent debts (such as catching up on a home mortgage) can often get paid ahead of the taxes.
- Usually you don’t pay any ongoing interest or penalties on the tax during the Chapter 13 case. That takes away the need to pay it quickly. Plus the lack of additional interest and penalties significantly reduces the amount needed to pay off the tax debt.
- If the IRS/state recorded a tax lien against your home or other assets before you filed bankruptcy, Chapter 13 provides a very efficient and favorable forum to value and pay off that secured portion of the priority debt.
Posted by Kevin on January 21, 2019 under Bankruptcy Blog |
Say you owe $8000 on your 2018 federal taxes and have $18000 of credit card debt. If you file under Chapter 7, you should discharge the $18,000 credit card debt, but you will owe the IRS $8000- and they will come after you.
Chapter 13 can help.
Payment of 2018 Income Taxes in Chapter 13 Case
Chapter 13 is a very flexible procedure, especially appropriate for taking care of income tax debt. If you file in 2019, your plan will include taxes owed in 2018. In fact, that 2018 taxes (and any other years) income tax MUST be paid in full under the terms of your Chapter 13 plan. But the requirement that you pay that tax in full can be used to your advantage in a Chapter 13.
Basic Benefits
No matter what else is going on in your Chapter 13 case, you get three major benefits for paying your 2018 taxes through it.
1. The IRS (and any applicable state income tax agency) cannot harass you during the repayment process.
2. You have much more flexibility on the terms for paying the 2018 tax, including the ability to delay paying anything while focusing on even higher priorities (such as a home/vehicle/child support arrearage).
3. No additional interest or penalties are added while you are in the Chapter 13 case, so you will pay less while paying off the 2018 tax debt.
Paying Off Your 2018 Tax For Free
Sometimes the fact that you owe some recent income taxes can cost you absolutely nothing beyond what you would have had to pay anyway through your Chapter 13 case. How could this be?
The justification for this comes from the Chapter 13 requirement that you must pay all your “disposable income” into your plan each month during the required period of time. Usually that means that all your creditors are scheduled to receive a certain percent of the debt you owe them. However, priority creditors (including taxes) and secured creditors are paid first, and then whatever is left over is divided among the “general unsecured” creditors (credit cards).
An Example
Say you have disposable income of $300 per month, a 3 year plan and general unsecured debts of $18,000. You have to pay into the plan (assuming no trustee or attorney fees for the sake of simplicity), $10,800 (36 months times $300 per month) which would go to “general unsecured” debts.
But now assume that you have a 2018 income tax debt of $8,000. You would still pay $300 per month for 36 months, but now the $8,000 income tax would be paid out first, reducing the amount paid out to the “general unsecured” creditors. Those creditors would receive only $2,800 ($10,800 minus $8,000) out of the $18,000 owed to them, and you still get a discharge.
Since those 2018 taxes are not dischargeable, you, are, in effect, paying your taxes off the backs of your unsecured creditors. And you not only discharge your credit card debt but you paid your taxes in full. Not bad.
Posted by on July 22, 2016 under Bankruptcy Blog |
Many of the laws about bankruptcy are time-sensitive. When your case is filed can have significant consequences. This blog will address how timing of a bankruptcy filing can effect what debts can be discharged.
Income Taxes Can Be Discharged, with the Right Timing
Federal and state income taxes are forever discharged if you meet a number of conditions. Two of the most important of these conditions are met by just waiting long enough before filing your bankruptcy case:
- Three years must have passed since the time that the tax return for that tax was due (plus any extension if you asked for one).
- Two years must have passed since you actually filed the pertinent tax return.
For example, assume a taxpayer owes $10,000 to the IRS for the 2009 tax year. She had asked for an extension to file that year to October 15, 2010, but then did not actually file that tax return until October 31, 2011. The above 3-year condition is met after October 15, 2013, because that is three years after the tax return was due. But the 2-year condition has to be met as well, which would not occur until after October 31, 2013, two years after the actual tax return filing date. So filing a bankruptcy case on or before October 31, 2013 would leave that $10,000 tax debt still owing; filing on November 1, 2013 or after would result in it being discharged forever. Simply waiting this one day makes a difference of $10,000.
Now, there are other conditions involved in getting taxes discharged. So, it would be wise to seek professional help.
Posted by on August 15, 2015 under Bankruptcy Blog |
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.
Posted by on August 11, 2015 under Bankruptcy Blog |
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.
Posted by on April 30, 2015 under Bankruptcy Blog |
The last blog was about using Chapter 7 to discharge all or most of your debts other than taxes, so that afterwards you could afford to pay off the taxes through monthly payments to the IRS and/or the state. Or if you needed more payment flexibility, the usual alternative would be a Chapter 13 payment plan.
But there’s another possibility.
What if Neither Chapter 7 + Tax Payment Plan, Nor a Chapter 13 Will Work?
You may need a bankruptcy no matter what, to deal with debts other than taxes. But a Chapter 7 case may leave you owing too much income tax to be able to afford the minimum monthly payments that the IRS or the state would require. And a Chapter 13, as helpful as it can be for dealing with tough tax problems, may not be helpful enough. Chapter 13 requires payment in full of all “priority” debts—which includes non-dischargeable taxes—during the life of the case. That means a maximum of 5 years. You may just not have enough money available to pay into a Chapter 13 plan to do that.
So your best option may be to file a bankruptcy and then try to settle with the IRS and/or the state for less than you owe them.
Chapter 7 + Tax Settlement
A tax settlement would often be done in conjunction with and after a Chapter 7 bankruptcy filing, for three reasons:
1. If you owe a bunch of taxes, you are extremely likely to also owe lots of other debts, which need to be dealt with through bankruptcy.
2. Some of your older tax debts may be dischargeable. Trimming that debt away with a Chapter 7 bankruptcy would reduce the amount of remaining tax debt to be settled.
3. With an IRS Offer in Compromise or similar state procedure, you would need to show that you are pretty much focusing all your available financial resources on the settlement. It usually helps to get rid of your other debts to be able to do that.
Clean Your Slate of Other Debts So You Can Settle Your Taxes
You may owe too much in nondischargeable taxes to be able to make either the minimum permitted tax installment payments after the Chapter 7 case, or the necessary Chapter 13 plan payments. Then you may not have much choice except to attempt a tax settlement after completing a Chapter 7 case. (You generally cannot attempt an Offer in Compromise while in a Chapter 13 case.)
But even if you don’t seem to have much choice, before filing your Chapter 7 case you should still have a good idea what the IRS/state might accept once you make the offer a few months later. The basic settlement standard with the IRS is, as stated on its website, that “the amount offered represents the most we can expect to collect within a reasonable period of time.” Determining what that means in your situation, and so whether a particular settlement offer will fly, are delicate judgment calls, which is why you need to work with an experienced professional. Talk with your bankruptcy attorney about whether he or she regularly negotiates IRS Offers in Compromise and/or tax settlements with the state. If not, get a referral to a tax attorney or accountant who does.
Posted by Kevin on January 18, 2014 under Bankruptcy Blog |
Filing bankruptcy with or without your spouse, and under Chapter 7 or Chapter 13, may affect what protection you each receive.
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The last few blogs have been about what happens if you file bankruptcy with or without your spouse, and whether you file under Chapter 7 or 13. Today’s blog addresses the protections you and your spouse get or don’t get from collection activity by the IRS (and any pertinent state income tax agencies) under those options.
The “automatic stay” which you get with any bankruptcy filing stops the IRS and state agencies from any further collection actions just like any other creditor. But to get this protection, whoever owes the tax has to be in on the bankruptcy filing. The co-debtor stay of Chapter 13 does not apply to income taxes, so that does not give any help to a non-filing spouse.
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The “Automatic Stay” Applies to Income Tax Debts
Some people have the misimpression that the IRS and other income tax authorities are exempt from the “automatic stay,” the protection from creditor collection you receive immediately when your bankruptcy is filed. Not true. If the IRS continues to pursue a tax debt after being given notice of a bankruptcy filing, it is breaking federal law just like any other creditor. And the bankruptcy court can order the IRS to pay damages if it does break the law. Since the IRS and similar state agencies have been punished for this in the past, they tend to follow the law and stop collections right when you file bankruptcy, like most other creditors.
There ARE some exceptions to the “automatic stay” that apply to taxing authorities—actions that they can still take in spite of a bankruptcy filing, but these actions are very limited.. They can “assess” a tax (determine the amount of tax) and send out a notice about it, make a demand for tax returns, send a notice of tax deficiency (but not act to collect on that deficiency), and conduct an audit (but again not act to collect any debt arising from the audit). So these permitted actions are deemed not to involve actual collection activity.
The “Automatic Stay” Applies Only to the Filing Spouse(s)
The “automatic stay” protects only the debtor—the person or persons filing the bankruptcy case, and his or her, or their, assets. On a jointly owed tax, if only one spouse files the bankruptcy, the IRS or state agency can continue pursuing the non-filing spouse as if the bankruptcy was not filed. And because the tax debt is jointly owed, the non-filing spouse can be required to pay the debt in full.
Chapter 13 “Co-Debtor Stay” Does Not Apply to Income Taxes
The lack of protection for the non-filing spouse is true both under Chapter 7 and 13, because the usual protections for non-filing “co-debtors” in Chapter 13 under the “co-debtor stay” do not work. As discussed a couple blogs ago, the ‘co-debtor stay” provides a way to protect even non-filing spouses from consumer debts owed jointly with a spouse filing under Chapter 13. But it’s inapplicable to income taxes owed to the IRS or other tax agencies, basically on the rationale that the “co-debtor stay” applies only to “consumer debts,” and courts have determined that income taxes are not “consumer debt.”
Applying the Stay Rules to Income Taxes
Because the tax agencies can pursue a non-filing spouse who jointly owes an income tax—under both Chapter 7 and 13—both spouses need to file bankruptcy whenever there is any significant joint tax debt.
Usually this means a joint filing—two spouses filing together on one bankruptcy case. But sometimes—when their financial circumstances are different enough, or perhaps when the marriage is not stable—they may find worthwhile for each to file a separate case, and maybe for one to file a Chapter 7 case and the other a Chapter 13 one.
Lastly, the IRS has been known to not pursue a non-filing spouse if the taxes are being paid in full through the other spouse’s Chapter 13 plan. But this would be done purely at the discretion of the IRS, and should not be counted on unless first carefully discussed with your attorney. But even in these situations, the non-filing spouse is on the hook for penalties and interest that can be wiped out in a Chapter 13 plan. This is yet another reason to include both spouses in the Chapter 13 filing.
