Chapter 13 Tax Bankruptcy
CHAPTER 13 BANKRUPTCY EXPLAINED
If you are are underwater with debt but believe you can obtain a fresh start with some reorganization, Chapter 13 bankruptcy may be the answer for you, particularly if you would like to keep your property. You present all your assets and debts to the Bankruptcy Court along with a plan to repay the debt, or a portion of your debt, over a period of three to five years.
If the court approves your plan, you will make payments to the bankruptcy trustee. The trustee, who is paid a fee for his or her services, then pays your creditors. Some creditors you will pay in full, other creditors will be paid a portion of the debt you owe. You cannot miss a payment. At the end of the payment period, your remaining debt will be discharged if you have complied with all the terms of the repayment plan.
Before you file your Chapter 13 bankruptcy petition, you must:
- Receive credit counseling from a counseling agency that has been approved by the U.S. Trustee’s office.
- Prove you filed your income tax returns for the previous four years.
- Have enough income to meet the payment obligations under the repayment plan. If your debt is too high, and your income too low, you may not qualify for Chapter 13.
- Pay a filing fee to the court.
All secured debts, such as your mortgage or car loan, must be paid in full. Other debts that must be paid in full include back alimony and child support, most tax debts and any wages or benefits you owe to employees. You do not surrender any property and all payments come from your current income. You must have enough income to repay your back secured debts under the repayment plan as well as your ongoing secured debts, like your mortgage or car loan payments. If the court finds your income is too low, it may not allow you to file for Chapter 13. Your repayment plan will be from three to five years, depending on the amount of your income. In a Chapter 13 case, secured tax claims and priority taxes have to be paid in full over three to five years (usually five). Non-priority taxes usually will not be paid in full but will only receive “cents on the dollar.”
DISCHARGING TAXES IN CHAPTER 13 BANKRUPTCY
Whether tax debts can be discharged in a Chapter 13 bankruptcy is often a complicated answer that should be determined by a tax bankruptcy professional.
A classification of taxes known as Priority Taxes cannot be discharged in Chapter 13. Generally, income taxes are priority taxes if they meet either of two tests found in the bankruptcy law— the Three Year Rule and the 240 Day Rule.
- Under the three year rule, if the tax return due date for the particular income tax year was less than three years before the bankruptcy is filed, then it is a priority tax, or if an. extension was filed, the three year rule is calculated from the date of that extension.
- Under the 240 day rule, if the income tax was assessed within 240 days before the bankruptcy is filed, then it is a priority tax.
Other Priority Taxes include federal withholding and withheld FICA taxes and sales tax. Anything not a Priority Tax may be discharged in Chapter 13.
Even though income taxes may not qualify as priority taxes, they still might be excepted from discharge for other reasons.
- Late filed tax returns: The taxes related to a tax return that was filed late are not dischargeable if the return was filed within two years before the bankruptcy case was filed.
- No tax return filed: The taxes related to any unfiled tax return that should have been filed, are not dischargeable.
- A fraudulent tax return: The taxes related to a fraudulent tax return are not dischargeable.
Chapter 13 can provide relief from many types of debt, including tax liability, but it is not something to be done without careful consideration and planning. Contact us today for a tax bankruptcy consultation.
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