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Can Tax Debt be Discharged in Chapter 13?

Can Tax Debt be Discharged in Chapter 13?

Tax Debt and Chapter 13

If you’re dealing with overwhelming tax debt, you may be wondering if filing for Chapter 13 bankruptcy can offer relief. While tax debt is often tricky to manage, this form of bankruptcy provides a potential pathway to get back on track.

Chapter 13 Bankruptcies in the United States in 2023 were recorded for 182,630 non-business and 1,326 business bankruptcies. [1]

However, not all tax debts are eligible for discharge under Chapter 13, and understanding the specific conditions that apply is fundamental. In this post, we’ll explore whether tax debt can be discharged in Chapter 13 bankruptcy, what qualifies, and how you can use this process to your advantage.

Tax Debt and Chapter 13

Can Tax Debt be Discharged in Chapter 13?

The short answer is yes, but with certain conditions. Not all tax debts are dischargeable in Chapter 13, and there are specific rules governing when and how they can be eliminated. Generally, income tax debts may be discharged if they meet certain criteria, including:

By meeting these requirements, you may be able to eliminate a significant portion of your tax debt through Chapter 13 bankruptcy, giving you a chance to recover financially.

Can Tax Debt be Discharged in Chapter 13?

How to Discharge Tax Debt in Chapter 13 Bankruptcy

Discharging tax debt in Chapter 13 requires careful planning and understanding of both the bankruptcy and tax laws. Here are the key steps to help you discharge tax debt through a Chapter 13 filing:

File for Chapter 13 Bankruptcy

To begin the process, you must file for Chapter 13 bankruptcy with the court. This involves submitting detailed financial information, including your income, expenses, assets, and liabilities. The court will then approve a repayment plan based on your ability to pay.

Determine if Your Tax Debt Qualifies

Not all tax debts can be discharged, so it’s necessary to determine if your tax debts meet the necessary criteria. Generally, income taxes are eligible, provided they meet the following:

Include Tax Debts in the Repayment Plan

Once you file for Chapter 13, your tax debts are treated as part of your repayment plan. In many cases, you will continue to make monthly payments toward your tax debt during the course of the plan, and the IRS will typically stop further collection actions like garnishments or levies.

Comply with the Bankruptcy Plan

The Chapter 13 repayment plan generally lasts three to five years, during which you must make regular payments toward your debts. To successfully discharge your tax debt, it’s essential to follow the plan and make the required payments. At the end of the repayment period, any remaining eligible tax debt may be discharged, relieving you of the obligation.

Seek Professional Advice

Because tax law can be complex, consult with a bankruptcy lawyer and a tax professional before proceeding with Chapter 13. They can help you understand the specifics of your tax situation and ensure that you’re following all the necessary steps to discharge your tax debt.

Seek Professional Advice

What Happens After Your Chapter 13 Plan Ends?

Once your Chapter 13 bankruptcy plan is complete, you’ll have successfully followed a repayment plan for 3 to 5 years. The outcome of your tax debt depends on whether it was discharged or still remains after the plan is complete:

Discharged Tax Debt

If your tax debt was successfully discharged during the bankruptcy process, it will no longer be your responsibility after the plan ends. Any unpaid tax obligations that were eligible for discharge and met the criteria will be eliminated. However, non-dischargeable tax debts, like some recent taxes or fraudulent debts, must still be paid.

Remaining Tax Debts

If some of your tax debt wasn’t discharged (e.g., if it didn’t meet the eligibility requirements), you will need to continue paying it according to the terms of the bankruptcy or under the original tax agreement. The court may set up a new payment plan, or you may work directly with the IRS or other creditors to resolve the remaining debt.

Remaining Tax Debts

End of the Bankruptcy Process

After completing your plan, you’ll receive a discharge order from the court, marking the official end of the Chapter 13 bankruptcy process. This order releases you from most remaining unsecured debts, giving you a fresh financial start.

Remember, the success of your tax debt discharge relies heavily on the eligibility criteria and careful planning throughout your bankruptcy case. Regularly check in with your bankruptcy attorney to make sure everything proceeds smoothly until the end.

Navigating debt in Chapter 13 bankruptcy can be a complex process, but it offers a path to resolve significant financial burdens. While not all tax debts are dischargeable, many can be reduced or eliminated through the structured repayment plan. Understanding the eligibility criteria and working closely with your attorney is key to achieving the best possible outcome.

To explore your options and determine if you qualify for a Chapter 13 bankruptcy, reach out to Richard West.

FAQs

No, not all tax debts are dischargeable in Chapter 13. Income taxes that meet specific criteria may be discharged, but other taxes like payroll taxes or fraud penalties typically cannot be eliminated.

If your tax debt is not dischargeable, Chapter 13 allows you to reorganize your debt into a manageable repayment plan, which can extend up to 5 years. This can help you pay off your taxes over time while preventing penalties and interest from accumulating further.

Yes, if the tax debt is dischargeable, it can be reduced or eliminated under Chapter 13. Even if not fully discharged, you may still benefit from reduced payments through the bankruptcy plan.

Typically, any tax refunds received during your Chapter 13 repayment plan are considered part of your disposable income and may need to be turned over to the bankruptcy trustee to be applied to your repayment plan.

Chapter 13 may prevent further enforcement actions such as wage garnishments or bank levies, but it does not automatically remove tax liens. The lien may remain on your property until the tax debt is paid off.

Yes, consulting an experienced bankruptcy attorney is highly recommended to determine the eligibility of your tax debts and navigate the complexities of Chapter 13 bankruptcy. An attorney can help you create a strategic repayment plan and understand your options.

Sources:

[1] Chapter 13 bankruptcy filings by debtor U.S. 2023 | Statista. (2024, July 5). Statista. https://www.statista.com/statistics/1118195/bankruptcy-filings-us-chapter-13-debtor
[2] Chapter 13 – Bankruptcy Basics. (n.d.). United States Courts. https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-13-bankruptcy-basics

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