Can You Manage Tax Debts with a Chapter 13 Bankruptcy Filing?

March 14, 2019 By: Carrie Weir

In an earlier blog, we discussed the limitations on discharging a tax liability through a Chapter 7 bankruptcy filing. You can, however, use a Chapter 13 debtor reorganization to reduce the amount you must pay every month. In addition, you may actually be able to discharge some of your tax debt at the end of the Chapter 13 process. The tax debt must, however, be characterized as “non-priority, unsecured debt.”

When Will a Tax Arrearage Be Deemed Non-Priority Unsecured Debt?

There are five criteria that must be established to categorize debt as non-priority and unsecured:

• The tax must have been an income-based tax—Taxes on wages and self-employment income qualify. All other debt is considered to be priority debt.
• Tax arrearages will not qualify as non-priority and unsecured if incurred through fraud or willful tax evasion
• The taxes must be from a return that was due at least three years before your Chapter 13 filing (that refers to the actual due date of the return, not the date it was filed).
• The return must have been filed at least two years before your Chapter 13 petition. You must have actually submitted the return. The debt will not be construed as non-priority unsecured debt if the IRS imputed income or prepared a substitute return for you.
• The tax authority must have assessed the amount due at least 240 days before your bankruptcy proceeding was initiated.

Tax debt that is properly characterized as non-priority and unsecured will be pooled with similar debt, such as credit card obligations and medical bills. In a Chapter 13 plan, secured and priority debt are generally paid first. Accordingly, any unsecured and non-priority debt still unpaid at the end of the Chapter 13 period may be discharged.

Contact Heath, TX Bankruptcy Attorney Carrie Weir

I provide a free initial consultation to anyone with questions or concerns regarding a bankruptcy filing. Contact my office by e-mail or call me at 972-772-3083 for a private meeting. With offices in Rockwall, Texas, I represent clients in Heath, Greenville, Lavon, Wylie, Mesquite and Rowlett.