How Do Taxes Work For Discharged Debt In A Chapter 13 Bankruptcy?

Learn how taxes work for a discharged debt in a Chapter 13 bankruptcy.

Chapter 13 Bankruptcy, also known as Wage Earner's Plan, is a reorganization bankruptcy that is meant for those individuals who have a regular income. There are some limitations to this, however. They cannot have more than $394,7255 of unsecured debt or $1,184,200 of secured debt. With a Chapter 13 bankruptcy, the individual agrees to a court-approved repayment plan of the debt. Chapter 13 repayment plans tend to last between 3-5 years.

In the case of Chapter 13 bankruptcy, taxes work differently for discharged debt on the basis of tax obligation; i.e. whether it’s a priority or non-priority tax obligation. Priority tax debts are not dischargeable in bankruptcy. This means the individual has to fully pay them off through a Chapter 13 repayment plan. On the contrary, non-priority tax obligations are considered the same as that of other general unsecured debts (i.e. credit cards, medical bills, etc.). These can easily be wiped out when the individual receives a discharge.  

Priority Tax Obligations (Non-Discharged Debt):

The majority of the taxes are considered priority debts. Receiving a discharge does not eliminate priority tax obligations. As the name implies itself, priority tax obligations do not go away during bankruptcy. The focus should be the priority tax obligations. In the case of filing for Chapter 13 bankruptcy, it is compulsory to pay priority tax debts in full. An affordable and convenient method is provided to the debtors in Chapter 13 bankruptcy in order to pay their tax debts over a period of three to five years. Additionally, priority tax obligations can reduce the total amount. Otherwise, it would be mandatory to pay towards the non-priority unsecured debts through Chapter 13 repayment plan of the bankrupt.

Common Chapter 13 Priority Tax Obligations

Here is a list of the most common and fundamental priority tax debts that are required to be paid back:

  • Current tax obligations
  • The property taxes incurred within one year before filing for Chapter 13 bankruptcy.
  • Withheld or collected taxes, e.g. Payroll taxes.
  • Various types of employment taxes, excise taxes, as well as customs duties.
  • All penalties are related to non-dischargeable taxes or priority tax obligations.
  • Sales tax collected from the customers.
  • Erroneous tax refunds or credits that are related to non-dischargeable taxes.
  • Trust fund taxes

Non-Priority Tax Obligations (Discharged Debt):

Chapter 13 bankruptcy enables the individual to discharge certain older income tax obligations. This is only true if they meet the criteria of non-priority tax debts. If an individual succeeds to prove that a part of his/her tax debts is non-priority, there is a chance the court will not require you to pay off the full tax debt through the Chapter 13 repayment plan. The court bases the owed amount on the income, assets, expenses, and other exemptions. It will discharge all remaining non-priority taxes at the end of your bankruptcy. The court also forgives other general unsecured debt at the completion of the Chapter 13 repayment plan.

Common Chapter 13 Non-Priority Tax Obligations

Common requirements for the income tax debt to be considered as non-priority tax debts or discharged debt:

  • The tax return must be due at least three years prior to the filing for bankruptcy (that also includes all received extensions, if any).
  • The individual must have filed the return at least two years before filing for bankruptcy.
  • The court find the individual free of any fraudulent activity or evasion of tax laws.
  • The IRS must not have assessed bankrupt liability for the tax debt within the 240 days before filing for bankruptcy.

Secured Tax Debts

The secured liability is the one for which the taxing agency takes steps for gaining an ownership interest in the property of an individual. If the tax debt of an individual is a secured liability, the court will not discharge it.

Secured Debt Examples:

  1. Tax Liens: Taxing authorities may put a lien on you to secure a payment if you owe a large amount. In the case of Chapter 13 bankruptcy, it is necessary for the affected individual to pay the full amount of the tax lien through the Chapter 13 repayment plan. A discharge does not relieve tax liens.
  2. Recent Property Taxes: Tax liens against property secures all property taxes. This is the reason why any owed balance is necessary to pay in full through the Chapter 13 repayment plan.

This is a guest post by a guest author. The views expressed may be those specifically of the guest author. This is not legal advice. Do not construe it as such.

More News Stories

April 20, 2022
What You Need to Know About Chapter 13 Bankruptcy Debt Limits 2022

Are you wondering what all you need to know about Chapter 13 debt limits in 2022? Keep reading to get up to date information on the debt limits you need to know about.

Read story
April 20, 2022
See Examples of A Chapter 13 Payment Plan

If you are wondering what a Chapter 13 bankruptcy may cost, read through this overview of a Chapter 13 repayment plan.

Read story
March 29, 2022
Chapter 13 Calculator: Estimate Your Repayment Plan

This Chapter 13 Calculator can help you estimate your Chapter 13 plan payment. The calculator is based on the official Chapter 13 bankruptcy forms.

Read story