Law Office of Robert L. Firth
Chapter 13 Advantages for Resolving Income Tax Debts
If Chapter 7 doesn’t discharge your income taxes or let you pay or settle them reasonably, Chapter 13 is often easier, cheaper, and safer.
The Chapter 7 Options
The last few blog posts have covered the following ways of dealing with income tax debts with a Chapter 7 “straight bankruptcy”:
- discharging (writing off) certain income taxes;
- making reasonable monthly installment payments on any taxes that aren’t discharged;
- settling with the IRS or state if you can’t pay even in installments; and
- paying all or part of your tax debt through an “asset Chapter 7 case.”
These often work, individually or in combination, to provide a good resolution of your tax debts. But when they don’t Chapter 13 “adjustment of debts” is a more powerful and often more flexible option.
Chapter 13 as The Easiest Way to Deal with Your Income Tax Debts
A Chapter 13 payment plan is often a much easier way to deal with taxes because:
- The tax payment amount is usually less than the IRS/state would require. That’s because the payment is calculated using more reasonable personal/family expense amounts.
- Your Chapter 13 plan incorporates ALL your debts in one package. So you’re not forced to satisfy the IRS/state to the exclusion of other important creditors. In fact taxes often have to wait for payment until after debts that may be a higher priority for you, such as your mortgage, vehicle payments, and/or child/spousal support.
- All of your income taxes are included—particularly both those that are being discharged and those that aren’t. This avoids the situation under Chapter 7 in which you discharge some of the taxes but then have to deal directly with the IRS/state with the rest.
- You and your bankruptcy lawyer can usually adjust the payments you make to the IRS/state if your circumstances change.
Chapter 13 as A Cheaper Way to Deal with Taxes that Aren’t Discharged
It can be cheaper because:
- Under Chapter 13 usually no more interest and penalties are added after you file your case.
- You often don’t pay even the previously accrued penalties, or you pay only a portion.
- You pay less money to resolve and get the release of tax liens on your home or other assets. Chapter 13 provides an efficient and debtor-friendly way to determine the secured value of the tax lien, greatly reducing the IRS/state’s leverage.
Chapter 13 as A Safer Way to Take Care of Income Taxes
It’s safer because:
- You’re not constantly at the mercy of the IRS/state if you can’t make a payment. Under Chapter 13 you are constantly protected from all your creditors—including tax creditors—throughout your multi-year case. You don’t have to worry about a recorded tax lien on your home or levies on your wages or bank accounts.
- This protection has conditions. But if you and your bankruptcy lawyer act proactively you can usually preserve this protection.
- This protection becomes particularly important if your financial circumstances change. As mentioned above, you don’t need to be at the mercy of the IRS/state. You can usually make adjustments to your Chapter 13 plan. If needed you have other more aggressive or creative steps available, such as ending your present case and starting a new one. Overall Chapter 13 is safer because you have more options and more control over them.