How does Chapter 13 Bankruptcy help with IRS Taxes?

Tax debt article written by Columbia, SC attorney Daniel Stone

Chapter 13 bankruptcy can help debtors with both IRS and South Carolina Department of Revenue taxes. Most people assume bankruptcy cannot eliminate taxes. While it is true that bankruptcy cannot discharge many debts, there are some taxes that Chapter 13 bankruptcy can lower to the same rate as a debtor’s other unsecured creditors.

In Chapter 13 bankruptcy, different creditors get paid different amounts depending on their class level in bankruptcy. One of the highest level is a securedsctax. Even with secured tax debts, a Chapter 13 plan can offer a debtor different forms of relief. The most simple strategy is to pay the secured tax debt in full within the Chapter 13 bankruptcy if the secured tax debt is from tax filings within the last three years. However, if the secured tax debt is for income taxes filed more than three-years-ago,  in some circumstances a debtor can “value” the secured tax debt down to the equity in their real estate and personal property. Here is an example, say you owe $100,000 in secured tax liens on income tax returns filed five years ago. Assuming the taxes meet other IRS requirements, you could value this $100,000 down to the total equity in your home and personal assets. Lets further assume you only have $10,000 equity in your home and $7,500 in personal assets. You could value the $100,000 tax lien down to $17,500!

In addition, there is also benefits to non-priority taxes older than three years in bankruptcy. In bankruptcy lingo these taxes are referred to as non-priority unsecured taxes. The IRS and South Carolina state taxes can be assessed as non-priority unsecured if the taxes are income taxes, are older than three-years-old, and meet additional elements. Please note this only applies to taxes that were filed. Un-filed tax returns do not apply. To see if Chapter 13 bankruptcy can help you with your tax debt, please call me to set  up a free consultation.

Finally, whatever the tax balance you owe can be paid through the Chapter 13 plan for five years. For instance, say that the IRS determines you have priority tax debt (income taxes owed within the last three years) of $10,000 and non-priority tax debt (income taxes older than three years) of $40,000. In your Chapter 13 plan, assuming other variables come into play, you could file a plan that proposes to pay the non-priority tax debt at 100% and the non-priority tax debt at a penny on the dollar. In our example, you could eliminate or discharge your tax debt by paying the $10,000 at no interest in full and lower the $40,000 debt down to $400 at no interest. Assuming you don’t have any other secured debt, you could eliminate the $50,000 combined tax debt with a Chapter 13 plan payment as low as $260.00 a month for five years.

If you are interested in seeing if Chapter 13 bankruptcy can help you with your tax debt, please feel free to call me to set up a free consultation.

- Stone Law Firm

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