Tax Debts and Bankruptcy Solutions
FOR CHAPTER 13 & CHAPTER 7
TAX DEBTS AND CHAPTER 13 BENEFITS
In a Chapter 13 case, the Debtor formulates a plan to re-pay their Creditors over a three to five year period. The Debtor makes a single monthly payment to the Bankruptcy Trustee who distributes the payment among the Debtor’s Creditors in the manner set forth in the Chapter 13 Plan. Tax debts are generally non-dischargeable in bankruptcy. However, Chapter 13 can offer significant benefits in dealing with taxing entities.
THE IRS IS FORCED INTO ACCEPTING AN INSTALLMENT AGREEMENT In a Chapter 13 case, the Debtor can force the IRS into accepting an installment agreement as part of the Chapter 13 re-payment Plan formulated by the Debtor. The Chapter 13 Plan must provide for full payment, in deferred cash payments, of all tax claims entitled to priority under Section 507(a)(8) of the Bankruptcy Code, unless the taxing entity, such as the IRS, agrees to different treatment.
INTEREST STOPS ACCRUING ON UNSECURED TAX OBLIGATIONS If the IRS has not filed a Notice of Federal Tax Lien “NFTL” against a Debtor’s assets prior to the date the Debtor initiates a Chapter 13 case, interest stops accruing on the unpaid tax liability. If the IRS HAS filed a NFTL, the tax obligation is secured by the lien, and interest must be paid on the tax debt to the extent of the value of the underlying collateral. For example, if you owe the IRS $8,000, and own property worth $5,000, interest would continue to accrue only on $5,000 of the tax debt. The remaining $3,000 portion of the tax debt would be unsecured.
TAX PENALTIES CEASE TO ACCRUE From the instant a Debtor files a Chapter 13 case, tax penalties to the IRS and Utah State Tax Commission stop accruing. Moreover, tax penalties are treated in the same manner as all other unsecured claims in the Debtor’s Chapter 13 case. Therefore, if a Debtor’s plan provides for partial payment to unsecured creditors, the Debtor would be permitted to partially re-pay tax penalties also.
CONSIDER AN OFFER IN COMPROMISE TO THE IRS In a Chapter 13 case, the Debtor must pay all of its Creditors within a three to five year period; and unsecured Creditors are often paid only a fraction of the original debt. Debtors will generally be able to pay their Creditors within this three to five year time period. However, if a Debtor owes a significant amount of non-dischargeable tax debt, the Debtor may be unable to repay the tax debt along with all of his or her other debts, within the appropriate time frame. In this case, a Debtor may wish to consider negotiating an offer in compromise with the IRS wherein the IRS may agree to reduce the tax debt and accept favorable terms for re-payment of the tax debt.
TAX DEBTS AND CHAPTER 7 OPTIONS.
OVERVIEW In a Chapter 7 case, all property owned by a Debtor becomes property of the bankruptcy estate upon initiation of the case. The Debtor is permitted to keep all exempt property, and all other property is turned over to the Bankruptcy Trustee for sale and distribution of the sale proceeds to Creditors. Debtors with non-exempt property they desire to retain should file Chapter 13 bankruptcy to preserve their assets as Debtors are permitted to keep all property in a Chapter 13. In Chapter 7, almost all of a Debtor’s debts are completely eliminated, and the Debtor emerges from Chapter 7 debt free. Certain debts, however, are not dischargeable in bankruptcy, including tax liabilities. Certain tax liabilities, however, may be discharged in bankruptcy.
UNSECURED TAX DEBTS CAN BE DISCHARGED IF FOUR CONDITIONS ARE MET:
- The Debtor did not file a fraudulent return or attempt to evade paying taxes;
- 2-YEAR RULE. The liability is for a tax return actually filed at least two years before the date the bankruptcy case is initiated;
- 33-YEAR RULE. The tax return was due at least three years, including any time or extensions, at least three years before the date of filing the bankruptcy petition;
- 240 DAY RULE. The taxes were assessed at least 240 days before the date of filing of the bankruptcy petition.
The above time periods are extended based on certain specific actions such as a prior bankruptcy filing, pending Offer in Compromise, and other limited actions.
TIP: Timing can be important in attempting to discharge old tax liabilities. Consult with a bankruptcy attorney to evaluate the proper time for you to file bankruptcy to enable you to take advantage of the Chapter 7 discharge.
NO INFORMATION CONTAINED HEREIN IS INTENDED TO CONSTITUTE LEGAL ADVICE, AND IS NOT APPLICABLE TO ANY SPECIFIC SET OF FACTS, ESPECIALLY AS TO ANY INDIVIDUAL’S PERSONAL SITUATION. THE INFORMATION CONTAINED HEREIN NOR THE PERUSAL OF IT DOES NOT ESTABLISH NOR CONSTITUTE AN ATTORNEY-CLIENT RELATIONSHIP WITH HUNTSMAN LOFGREN & ASSOC. OR ANY OF ITS ATTORNEYS. THE INFORMATION SET FORTH ABOVE IS BASED ON NEW BANKRUPTCY LAWS WHICH BECAME EFFECTIVE OCTOBER 17, 2005 KNOWN AS THE BANKRUPTCY ABUSE PREVENTION AND CONSUMER PROTECTION ACT OF 2005 (BAPCPA). BECAUSE OF THE COMPLEXITY OF THE NEW LAWS, PLEASE REFER TO THE ACTUAL BANKRUPTCY CODE AND RULES AND/OR CONSULT WITH A BANKRUPTCY PROFESSIONAL TO EVALUATE THE APPLICATION OF THE ABOVE INFORMATION TO YOUR SPECIFIC SITUATION.