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Chapter 13 Conquers Your Income Tax Headaches by Saving Money, Giving You Flexibility, and Protecting You from The Irs and The Oregon Department of Revenue

April 18, 2014

If the taxes you owe don’t meet the conditions to be written off through Chapter 7, Chapter 13 can still give you huge advantages.

Chapter 7 Can Be Enough Help with Taxes, Sometimes

If you owe income taxes, you may be able to handle them in an effective way through Chapter 7 “straight bankruptcy,” as our previous blog posts have explained:

  1. If you meet all the necessary conditions, some older tax debts can be completely and permanently discharged (written off), so you don’t have to pay anything.

  2. Even if you have some taxes that can’t be discharged, discharging your other debts (perhaps also some older income taxes) may enable you to pay off the taxes you still owe through monthly installment payments directly to the IRS or Oregon Department of Revenue (ODR).

  3. If you absolutely do not have the means to pay the remaining tax debt through monthly payments, you may be able to settle the debt with the IRS through an “offer in compromise” or with the ODR through a “settlement offer.”

  4. You may be able to pay all or part of your tax debt through an “asset” Chapter 7 case, by surrendering any “non-exempt”—unprotected—asset(s) to the bankruptcy trustee for liquidation and distribution to the IRS/ODR.

The point here is that in some situations Chapter 7 will solve your tax problem sufficiently so that you do not have to go through the extra expense and time of a 3-to-5-year Chapter 13 case. But these Chapter 7 solutions will only work sometimes. When they don’t, Chapter 13 is often an incredibly good way to take care of all your income tax debts (and all your other debts as well). Chapter 13 A) enables you to pay less on those taxes you must pay, B) gives you important flexibility and convenience, and C) protects you from the aggressive collection methods of the tax collectors.

A. Chapter 13 Enables You to Pay Less on The Taxes You Can’t Discharge

It saves you money because:

  1. Under Chapter 13 usually no more interest and penalties can be added after the case is filed and throughout the payment period, reducing the amount you have to pay before being cleared of the tax debt.

  2. Most of the time you even don’t have to pay the previously accrued penalties, or only a portion.

  3. If an IRS tax lien or ODR “distraint warrant” has been recorded against your real estate or personal property, such a lien can usually be satisfied more cheaply than otherwise, because Chapter 13 provides a fair and efficient way to value and pay that lien instead of being at the mercy of the IRS/ODR’s leverage against you.

Especially if your tax debt is relatively large, and if you need to keep your Chapter 13 plan payments low so that they stretch out as long as the maximum five years, these savings can be substantial.

B. Chapter 13 Gives You Great Flexibility and Convenience

A Chapter 13 payment plan provides crucial flexibility and convenience compared to dealing directly with the IRS/ODR, in the following ways:

  1. The monthly plan payment amount is based on what you can actually afford, instead of whatever the IRS/ODR would insist on for a monthly payment. Chapter 13 usually allows you more reasonable amounts for your expenses, resulting in less money available for your tax and other creditors.

  2. ALL your debts are dealt with in one package under Chapter 13, so you are not forced to try to satisfy the IRS/ODR without regard to your other important creditors (like your mortgage, vehicle loan, and child/spousal support). If you have these kinds of debts the taxes can be made to wait to be paid until after debts that are more important to you. The tax creditors can’t usually insist on getting paid first regardless of the consequences for your other crucial creditors.

  3. All categories of your income taxes are handled in one package—including those that can be discharged and those that must be paid. You don’t have the Chapter 7 headache of perhaps discharging some of the taxes but then afterward having to deal directly with the IRS/ODR to make monthly payments on or otherwise make a settlement on the taxes that were not discharged. At the time you successfully complete your Chapter 13 case you are tax debt free and usually completely debt free (except for any ongoing current mortgage payments).

  4. The payments going to the IRS/ODR can be adjusted during the course of the Chapter 13 if your circumstances change, usually without the IRS/ODR having much basis to object. You are much more in the driver seat instead of always needing to bow to the discretion of the tax collectors.

C. Chapter 13 Protects You from the IRS and ODR

You get crucial protection in the following ways:

  1. Instead of being at the mercy of the IRS/ODR if you are ever not able to make a required payment, under Chapter 13 you have a powerful umbrella of protection called the “automatic stay.” It prevents all collection activity from all your creditors—including tax creditors—throughout the 3 to 5 years of your case. So you don’t have to constantly worry about being hit with levies on your paycheck and bank accounts, or tax liens on your home, vehicle, and everything else you own.

  2. Creditors—including the IRS and ODR—can ask the bankruptcy court that this protection be taken away from you, but if you and your attorney deal with your situation proactively you can usually prevent that and preserve the “automatic stay.”

  3. This protection is particularly important if your circumstances change during the course of your case. Instead of you having to work under the one-sided rules of the IRS/ODR, your attorney can usually make adjustments to your Chapter 13 plan. Or if necessary, other procedural options are available, such as switching to a Chapter 7 case, or dismissing your present Chapter 13 case and filing a new one. You are in control of the situation instead of having to bend whichever way the IRS/ODR requires.