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Can a Chapter 13 Bankruptcy Help You Pay Back Taxes?

Can a Chapter 13 Bankruptcy Help You Pay Back Taxes?

Unlike a Chapter 7 bankruptcy, a Chapter 13 bankruptcy allows you to protect more assets and catch up on overdue payments through a reorganization of your debts instead of an Chapter 7 liquidation. A Chapter 13 gives you the opportunity to pay back past due mortgage payments and taxes that are owed.

Chapter 13 Bankruptcy vs. an Installment Agreement

While some people equate filing for a Chapter 13 with setting up an installment agreement with the IRS, they are distinctly different. Chapter 13 completely stops penalties and interest from accruing and also allows you to pay your newest taxes first. You will be able to pay less than the full amount of tax debt for older taxes under certain limited circumstances, and stop all creditors, including the IRS, from contacting you in regard to collections. However, an installment agreement does not stop penalties or interest from accruing, does not necessarily allow you to lower the amount of taxes owed, and does not stop the IRS from contacting you.

Taxes Are Often a Priority Debt

When you repay creditors during Chapter 13 Bankruptcy, the IRS is generally considered to be a priority debt, except in the cases listed below. That means that your Chapter 13 plan will repay tax debt before paying off other debts, such as credit cards, medical bills or payday loans, and this is addressed in your Chapter 13 payment plan. While other creditors like medical bill collectors and payday loan providers are more aggressive in their approach to debt collection, the IRS has the most far-reaching capabilities for collection, including the ability to garnish bank accounts without a filing a lawsuit, so paying back taxes through a Chapter 13 plan should be your top priority.

Other types of priority taxes in a Chapter 13 bankruptcy include:

  • Sales tax from customers;
  • Trust fund taxes;
  • Specific custom duties, excise taxes and employment taxes;
  • Tax penalties on non-dischargeable taxes.

Nonpriority Taxes

While many types of taxes are considered priority debt, there are a few exceptions. Taxes are considered nonpriority and lumped in with credit card and medical debt if:

  • The taxes are on gross receipts or income.
  • The income taxes were due over 3 years before filing for bankruptcy. For example, tax returns for 2013 were due on October 15, 2014, if you requested an extension. If you waited until October 16, 2017 to file bankruptcy, that unpaid debt would not be considered a priority. However, if you filed before that deadline, the debt would be a priority.
  • You filed a tax return 2 years before filing the bankruptcy case if you didn’t file in a timely fashion or the IRS filed a substitute return on your behalf.
  • The IRS assessed the tax liability 240 days or more before you filed for bankruptcy.
  • You did not evade paying taxes for the year in question or commit fraud in filing.

Maryland Tax Debt

The same bankruptcy rules that apply to the IRS also apply to Maryland state taxes. Maryland state tax debt does not have a statute of limitations, so discharging the debt at the conclusion of your Chapter 13 repayment period could be the only way to completely eliminate your tax debt.Read our latest blog post to find out more!The same bankruptcy rules that apply to the IRS also apply to Maryland state taxes. Maryland state tax debt does not have a statute of limitations, so discharging the debt at the conclusion of your Chapter 13 repayment period could be the only way to completely eliminate your tax debt.

What About Your Tax Refund?

If you receive a tax refund during your Chapter 13 bankruptcy, in most cases the trustee will require you to turn the money over as part of your payments to creditors. However, if you can show that the refund is not disposable income in court, you may be allowed to keep the money. In Maryland, Steiner Law Group works closely with the trustees and may be able to help you keep your tax refunds.

Choose an Experienced Bankruptcy Attorney from Steiner Law Group for Help with Your Chapter 13 Bankruptcy

Steiner Law Group has years of experience working with individuals and families to safeguard assets and secure a better future through Chapter 13 bankruptcy. To learn more about how you can protect your assets and how an effective Chapter 13 plan can help you, contact us today by calling (410) 670-7060.

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