How Chapter 13 Can Help When You Owe Back Taxes

Reorganizing Tax Arrearages through Bankruptcy

If you have significant tax debt and you’ve considered bankruptcy as a way to get a fresh start, you’ve probably learned that tax obligations are extremely difficult, if not impossible, to discharge in a Chapter 7 petition. You can, however, include tax debt in a Chapter 13 filing. That can allow you to negotiate new payment arrangements with tax authorities, and get the benefits of the automatic stay, which will keep the IRS, as well as state and local tax agencies, from calling, writing or taking legal action (other than through the bankruptcy court) to attempt to collect the tax arrearage. Here’s how it works:

When you seek protection under Chapter 13, all debt brought into the bankruptcy proceeding will be characterized as either priority or non-priority debt. Anything deemed to be priority debt will have to be repaid in full as part of the Chapter 13 reorganization plan. However, non-priority debt may or may not be paid in full by the end of the bankruptcy period. As a general rule, Chapter 13 reorganization will spread your tax debt out over a longer period of time, making it easier to pay.

Like most other forms of debt, some tax debt is priority debt and some is not. The tax obligations that are considered priority debt include:

• The amount of a tax lien or any tax debt that is secured by collateral
• Withholding or employment taxes
• Most property taxes
• Excise taxes or customs duties
• Penalties incurred on non-dischargeable tax obligations

Non-priority tax debt, on the other hand, includes:

• Past-due income tax
• Any tax debt that was due more than three years ago (though it must have been included on a submitted return)
• Any taxes that were assessed at least 8 months before you filed bankruptcy
• Tax debts from returns filed at least two years ago

A non-priority tax obligation may lose that status (and become a priority tax debt) if there is evidence of fraud or willful tax evasion

Contact Attorney Howard N. Sobel

At the office of Howard N. Sobel, we provide comprehensive bankruptcy counsel to individuals throughout the state of New Jersey. Contact our office online or call us at 856-424-6400 to see if you qualify for a free initial consultation (on selected cases). Evening and weekend appointments can be arranged upon request. We accept all major credit cards.