IRS Debts And Bankruptcy
Recently, I have seen an upswing in the amount of people seeking advice concerning taxes owed to the Internal Revenue Service (IRS). While IRS debts are not generally dischargeable in a bankruptcy, a Chapter 13 may be beneficial to those seeking to pay the IRS in full without any interest or penalties accruing.
In a Chapter 13 bankruptcy, an individual makes monthly payments to the United States Trustee, who, in turn, makes distributions from the individual’s payment to the creditors.
Where an individual owes an amount in back taxes to the IRS, the IRS is generally considered an unsecured “priority” creditor in a bankruptcy proceeding. The IRS’ status as an unsecured “priority” creditor (as opposed to an unsecured “non-priority” creditor such as a credit card company or medical bill) affords the IRS the opportunity to take the portion of the debt it is owed first prior to credit card companies or other unsecured “non-priority” creditors.
For example, if an individual owes $5,000 in back taxes to the IRS and the individual’s Chapter 13 plan states that the unsecured creditors will receive a total of $7,000, the IRS would receive its full payment of $5,000, with a remaining $2,000 being split among the unsecured “non-priority” creditors. The benefit to the individual would be that, at the end of the Chapter 13 bankruptcy, the individual will not only be discharged from the credit card debts, medical bills, etc., but will also be relieved from the $5,000 IRS debt.
There are a few things to remember, however, when discussing IRS debts and your ability to pay these debts in a Chapter 13 bankruptcy as an unsecured “priority” creditor. First, it is important that you do not have a tax lien for the amount of taxes owed.
Tax liens, while they may be cleared up in a Chapter 13 bankruptcy proceeding, are treated in a different manner than tax debts to which a levy has not been imposed. I urge you to avoid a tax levy if at all possible.
Second, generally speaking, tax debts resulting from returns filed more than 3 years prior to filing a bankruptcy that have not been the subject of an IRS tax lien may be discharged as a general unsecured non-priority debt.
In any event, it is important to consider all options when determining whether a bankruptcy is your best option in dealing with your IRS debts. Please feel free to contact either myself or one of the other attorneys at the Dellutri Law Group for a free initial consultation if you have any questions concerning your IRS debts and how a Chapter 13 bankruptcy may be able to help.
This Blog was written by Attorney John Webb, Esq. of The Dellutri Law Group, P.A. Mr. Webb practices Bankruptcy Law, Fair Credit Reporting Act Law, Fair Debt Collection Practices Act Law and in other areas of Consumer Law.
