If Chapter 7 doesn’t discharge your income taxes or let you pay or settle them reasonably, Chapter 13 is often easier, cheaper, and safer.
The Chapter 7 Options
The last few blog posts have covered the following ways of dealing with income tax debts with a Chapter 7 “straight bankruptcy”:
discharging (writing off) certain income taxes;
making reasonable monthly installment payments on any taxes that aren’t discharged;
settling with the IRS or state if you can’t pay even in installments; and
paying all or part of your tax debt through an “asset Chapter 7 case.”
These often work, individually or in combination, to provide a good resolution of your tax debts. But when they don’t Chapter 13 “adjustment of debts” is a more powerful and often more flexible option.
Chapter 13 as the Easiest Way to Deal with Your Income Tax Debts
A Chapter 13 payment plan is often a much easier way to deal with taxes because:
1. The tax payment amount is usually less than the IRS/state would require. That’s because the payment is calculated using more reasonable personal/family expense amounts.
2. Your Chapter 13 plan incorporates ALL your debts in one package. So you’re not forced to satisfy the IRS/state to the exclusion of other important creditors. In fact taxes often have to wait for payment until after debts that may be a higher priority for you, such as your mortgage, vehicle payments, and/or child/spousal support.
3. All of your income taxes are included—particularly both those that are being discharged and those that aren’t. This avoids the situation under Chapter 7 in which you discharge some of the taxes but then have to deal directly with the IRS/state with the rest.
4. You and your bankruptcy lawyer can usually adjust the payments you make to the IRS/state if your circumstances change.
Chapter 13 as a Cheaper Way to Deal with Taxes that Aren’t Discharged
It can be cheaper because:
1. Under Chapter 13 usually no more interest and penalties are added after you file your case.
2. You often don’t pay even the previously accrued penalties, or you pay only a portion.
3. You pay less money to resolve and get the release of tax liens on your home or other assets. Chapter 13 provides an efficient and debtor-friendly way to determine the secured value of the tax lien, greatly reducing the IRS/state’s leverage.
Chapter 13 as a Safer Way to Take Care of Income Taxes
It’s safer because:
You’re not constantly at the mercy of the IRS/state if you can’t make a payment. Under Chapter 13 you are constantly protected from all your creditors—including tax creditors—throughout your multi-year case. You don’t have to worry about a recorded tax lien on your home or levies on your wages or bank accounts.
This protection has conditions. But if you and your bankruptcy lawyer act proactively you can usually preserve this protection.
This protection becomes particularly important if your financial circumstances change. As mentioned above, you don’t need to be at the mercy of the IRS/state. You can usually make adjustments to your Chapter 13 plan. If needed you have other more aggressive or creative steps available, such as ending your present case and starting a new one. Overall Chapter 13 is safer because you have more options and more control over them.