Can I Discharge Income Tax Debt in Chapter 7 or 13 Bankruptcy?

You Can Discharge Income Tax Debt in Chapter 7 or Chapter 13 Bankruptcy—Sometimes.

Discharge Income Tax Debt in Bankruptcy: Income Tax Debt in Bankruptcy Generally

You can discharge income tax debt, either Federal or State of Michigan, in Chapter 7 or Chapter 13 bankruptcy if the debt owed on a year-by-year basis, meets ALL of several criteria for eligibility. First, it is important to note that income tax debt, whether Federal or state income tax debt, is classified as a "priority" claim by the Bankruptcy Code. In a Chapter 7 bankruptcy context, that means that the debt is non-dischargeable and the bankruptcy will not affect the filing debtor's obligation to pay it. In a Chapter 13 bankruptcy context, "priority" classification means that the debt must be paid in its entirety within the term of the Chapter 13 bankruptcy payment plan (60 months maximum). More on tax debt and Chapter 13 payment plans below. But, when analyzing an individual tax debt to determine whether it is "dischargeable," we are also determining whether it is "priority unsecured" debt—or "non-priority unsecured" debt, like a medical bill or credit card. Non-priority unsecured debt is dischargeable; priority debt is not. It is also important, when beginning this discussion, to remember that each year for which you owe income tax debt is a separate debt to be analyzed on its own merits. The IRS may send you a bill for $50,000 total owed—but this may actually be comprised of $10,000 owed from 5 separate tax-years. Each of those tax-years is a separate "priority" or "non-priority" unsecured debt to be listed uniquely in your prospective Chapter 7 or Chapter 13 bankruptcy.

Discharge Income Tax Debt in Bankruptcy: Criteria for Dischargeability

The criteria for determining whether you can discharge income tax debt  in Chapter 7 or 13 are :

  • The age of the debt. The debt must be more than 3 years old dating back to the tax deadline of the year in which it was due (April 15th of the subsequent year ... For example, debt for tax year 2011 became due on April 15, 2012.). Likewise, if the return was filed within 2 years, even if the debt itself is more than three years old, it cannot be discharged.
  • The quality of the debt. The taxpayer must have filed a non-fraudulent, timely tax return, with no evasion.
  • The assessment of the debt. There cannot have been an assessment of the debt within 240 days for the debt to be dischargeable.

If these criteria are met, an income tax debt may well be dischargeable in a Chapter 7. You, as tax-payer and potential bankruptcy filer, may have very little clear idea as to any of these criteria, other than that you perhaps remember that you filed the return for the applicable year on time. When tax debt is at issue, the Michigan bankruptcy attorneys of The Hilla Law Firm will not work with assumptions or presumptions. We will, after being retained, obtain your IRS of Michigan Dept. of Treasury power of attorney in order to interface with IRS or state Treasury to obtain your tax account transcripts and other documentation necessary to fully analyze the dischargeability of each, individual tax year. It may be that certain of your tax debts are dischargeable, while others may not be. You will want to retain a bankruptcy lawyer willing to put in the effort to help you figure out the difference long before your bankruptcy petition is actually filed.

Discharge Income Tax Debt that Is Not Dischargeable via Payment though a Chapter 13 Payment Plan

In a Chapter 13 "payment plan" or reorganization bankruptcy, tax debt that is classifiable as "priority" and which is therefore not dischargeable, may still be repaid at 0% interest over the life of the Chapter 13 payment plan. This is a couple of percent better than the IRS will give you generally in its most generous workout schemes.

Thus, if you are in a 60-month Chapter 13 plan and owe $10,000 in tax debt, you will repay that tax debt at a rate of approximately $166.66 per month ($10,000 divided by 60 months, simply). Depending upon the size of the debt, this can be an ideal reason to consider a Chapter 13 bankruptcy rather than either a Chapter 7 bankruptcy or a straight payment plan if the taxing authority is requiring more than you can afford to pay. Best yet, the "automatic stay against collections," the master Federal injunction preventing creditors from engaging in collection attempts once a bankruptcy is filed is in force for the full duration of the Chapter 13, preventing and garnishment or levy or your paycheck or the perfection of tax liens—and it applies to the IRS just like any other creditor.

If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact us at (734) 743-1489. 

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