Bankruptcy Timing: Include Income Taxes Owed for 2015 by Filing Chapter 13 in Early 2016
Jan. 6, 2016
As of January 1, 2016 you can include any taxes you owe for the 2015 tax year in your Chapter 13 payment plan.
If you’ve been thinking about filing bankruptcy, and expect to owe income taxes for 2015, you have an extra reason to file a Chapter 13 “adjustment of debts” now that we’re in the new year. That’s because now that 2016 has begun you can include income taxes owed for the 2015 tax year in your new Chapter 13 case and payment plan. Being able to include taxes owed for 2015 gives you significant advantages.
It saves you money, gives you crucial flexibility, and stops future tax liens and other tax collections.
Saves You Money
Including what you owe in income taxes for 2015 in a Chapter 13 payment plan saves you money because almost always you don’t have to pay any additional interest and penalties on the tax owed. The savings can be huge.
That’s particularly true if you have other debts that you want or need to be paid ahead of the 2015 tax. That would delay payment of the taxes owed for 2015. As a result the savings from not paying any accruing interest and penalties would be that much greater.
Under Chapter 13 you would have to pay the tax itself owed for 2015 as a “priority” debt. But you would have the entire length of your 3-to-5-year court-approved payment plan to do so. No interest or penalties on the tax would accrue during this entire time as long as you pay your plan payments as agreed and thereby complete the case successfully.
Gives You Flexibility
Including your 2015 taxes in your Chapter 13 payment plan gives you tremendous flexibility in the payment of that tax. That’s crucial when you have other debts that need to be paid, and need to be paid more urgently. These can include:
Home mortgage arrearage to prevent your home from being foreclosed
Unpaid home real estate taxes, which could also put your home in jeopardy and usually carry a high interest rate
Vehicle loan arrearage or the monthly payments themselves needed to keep your vehicle
Child or spousal support arrearage, to prevent garnishment and the loss of your driver’s and other licenses
Prior income taxes with recorded liens, to protect the home or other possessions encumbered by the attached liens
Besides the flexibility to pay other creditors ahead of the 2015 taxes, Chapter 13 also can let you change the amount of your monthly play payment (a single payment that covers all your creditors) to adjust to changes in your income and expenses.
Stops Future Tax Liens and Other Tax Collections
Including your 2015 income tax debt in a Chapter 13 plan stops the IRS and/or state from taking virtually any collection actions on the 2015 tax debt throughout the years of the Chapter 13 case. This lack of collection pressure allows you to take so long to pay this tax.
Preventing future tax liens from being recorded on the 2015 taxes is especially helpful. Tax liens are dangerous because they give the IRS/state a great amount of leverage, and put your assets at risk. Chapter 13 allows you to avoid the recording of tax liens while paying off the tax at your pace, a significant advantage.
Practical Situations This Is Very Helpful:
Being able to include 2015 income taxes in a Chapter 13 payment plan is especially helpful if you owe taxes for prior years and if you need to file a Chapter 13 case for other reasons.
1) Owe Other Income Taxes
If you owe for the 2015 tax year plus a prior year or more, you may well be in a vicious cycle. You may simply not be making enough money to pay your monthly debt payments, have enough for reasonable living expenses, while paying enough in income tax withholdings or quarterly estimated payments to keep up on current taxes. So you’re either making no headway or slipping further and further behind.
You may even be in a monthly installment plan with the IRS and/or state for prior unpaid income taxes. But as a result you can’t afford to pay enough ongoing tax withholdings or quarterly payments because of what you have to pay towards the installment plan. And you know that it’s a violation of that installment agreement to not stay current on subsequent tax years, so you’re afraid of what’s going to happen when the IRS/state finds out that you owe for 2015.
This vicious cycle is broken by filing a Chapter 13 case, and particularly doing so early in 2016. That’s because now the 2015 tax year can be incorporated into your Chapter 13 payment plan, giving you the savings and flexibility and other benefits summarized above for the taxes owed both for 2015 and for the prior tax year(s). Your new budget will include enough withholding or quarterly payments so you can stay current for 2016 and future years. You may not need to pay older income taxes at all or only a small percentage of them, and will likely not need to pay any ongoing interest and penalties on any of the taxes. And you’d end the Chapter 13 plan being completely tax-debt free.
2) Need Chapter 13 for Other Reasons
If you owe income taxes for the 2015 tax year only, and the amount is not very large, a Chapter 7 “straight bankruptcy” may discharge enough other debts so that afterwards you could afford to pay off the taxes through reasonable monthly installment payments acceptable to the IRS/state.
But that’s if you don’t have some other good reason to be in a Chapter 13 case. You may have debts that you would continue either owing or being behind on if you filed a Chapter 7 case, which would be better handled under Chapter 13. Examples are child/spousal support and home mortgage arrearages. You may need some of the specialized tools available only under Chapter 13, such as stripping a second mortgage from your home’s title, a “cramdown” on a vehicle loan, or preserving an asset that is not otherwise exempt from turnover to the bankruptcy trustee. In these and various other situations it’s helpful that the 2015 income tax debt can be incorporated into a Chapter 13 payment plan.
This way you will be protected from all of your creditors as you deal with them all without leaving any loose ends to cause problems later.