Does Filing Chapter 13 Get Rid of My Tax Debt?


Do you owe personal income taxes? Has the Internal Revenue Service frozen your bank account or initiated wage garnishment? Are you receiving notices stating you are about to lose your assets if you do not pay your tax debt? If you answered yes to any of these questions, filing a bankruptcy case may help you resolve your debt problem. Let me explain how bankruptcy gets rid of your tax debt.


Filing a Chapter 13 Bankruptcy in New York


When you file a Chapter 13 bankruptcy case, your creditors must stop all collection efforts, including taxing authorities. The IRS and the state taxing authorities must have approval from a bankruptcy judge to continue wage garnishment, asset seizures, or other collection efforts. Your New York bankruptcy lawyer reviews the types of taxes you owe to determine how each tax will be treated in your bankruptcy plan. Not all taxes are treated the same.


Personal income taxes are treated as priority unsecured debts in a Chapter 13 plan. Priority debts must be paid in full through the plan. However, instead of having one lump sum, you break the tax debt over a 60-month plan. Furthermore, a portion of your tax debt may be considered unsecured debt.


Unsecured tax debt is treated as any other unsecured debt. You pay pennies on the dollar through your plan. At the end of your bankruptcy plan, any unsecured tax debt is discharged with your other unsecured debt. In other words, you do not owe any balance on the tax debt. Of course, this all depends on you finishing your Chapter 13 plan and keeping all future tax payments current during your bankruptcy case.


Some people question whether filing a Chapter 13 case is worth it because they still must pay their taxes back through the plan. Consider this — if you don’t file a Chapter 13 case, the IRS can seize your bank account and other assets. In some cases, the IRS may garnish your wages. Furthermore, you continue to incur penalties and interest. By filing a Chapter 13 case, you stop interest and penalties from accumulating, and you stop collection efforts.


Even if all tax debt is considered priority unsecured debt, filing a bankruptcy case may still be the best way to get out of tax debt. Furthermore, you can also discharge other debts giving yourself a fresh start free from tax debt and other unsecured debts when you complete your bankruptcy plan.


Chapter 7 Cases and Tax Debts


For individuals who do not have the income to fund a Chapter 13 plan, a Chapter 7 bankruptcy case might still help with some tax debt. In a Chapter 7 bankruptcy case, you can discharge personal income taxes provided you meet certain criteria including:


  • Personal income taxes must be at least three years old or older to be eligible for discharge in a Chapter 7 case;
  • The tax return that resulted in the tax debt being owed must have been filed at least two years prior to the filing of the bankruptcy case; and,
  • The tax debt in question must have been assessed by the IRS at least 240 days prior to the filing of the bankruptcy case.


In addition to the above requirements, a debtor cannot be guilty of willfully evading paying tax debt or committing tax fraud. Calculating the dates for the above deadlines can be complex in some cases due to extensions and other issues related to filing tax returns. An experienced Manhattan bankruptcy lawyer can help you determine if you qualify for discharging taxes in a Chapter 7 bankruptcy case.


Hiring a New York Bankruptcy Attorney for Tax Debt


The Law Office of William W. Waldner helps individuals find affordable solutions for tax debt. We offer free consultations for you to learn about your bankruptcy options and discuss if a bankruptcy or non-bankruptcy alternative is the best way to resolve your tax debt.


For your free appointment with a Manhattan bankruptcy lawyer, call (212) 244-2882 or use our online contact form. Don’t let personal income tax debt ruin your life or take assets that you need to take care of your family.