Can Chapter 13 Bankruptcy Help Resolve IRS Debt?

TRI Writer • April 1, 2020

Kenneth C Rannick PC, Kenneth C Rannick, bankruptcy, Rannick bankruptcy attorney, Tennessee bankruptcy attorney, Georgia bankruptcy attorney, Tennessee bankruptcy lawyer, Georgia bankruptcy lawyer, declare bankruptcy in Tennessee, declare bankruptcy in GeorgiaMany individuals overwhelmed by burdensome IRS debt turn to Chapter 13 bankruptcy for help, but certain types of debt are exempt from the general protection offered by bankruptcy.

Why Isn’t IRS Debt Automatically Included in a Bankruptcy Discharge?

Tax debt is considered a priority debt during bankruptcy. As a priority debt, tax debt is paid first when assets are liquidated (in a Chapter 7 bankruptcy) and included and paid in full in a Chapter 13 payment plan. Chapter 13 bankruptcy is based on a court-approved payment plan that allows the debtor to reorganize their debt and pay off as much as possible during a 3-5 year repayment plan (determined by the court in advance). The goal of Chapter 13 is to pay off creditors in full by completing the repayment plan as agreed, but remaining unpaid balances may be discharged once the plan is complete. As a priority debt, tax debt would be paid before other debts during the Chapter 13 repayment plan. Priority tax debts are not dischargeable in Chapter 13 bankruptcy.

Also of note: While a bankruptcy petitioner in a Chapter 13 bankruptcy is eligible to receive a tax refund during their bankruptcy, the return would most likely be rerouted to cover tax debt.

Can IRS Debt Be Discharged Through Any Type of Bankruptcy?

In minimal cases, tax debt may be dischargeable under Chapter 7 bankruptcy if the petitioner’s situation meets five criteria:

  1. The due date to file the tax return in question was over three years ago.
  2. The tax return was filed a minimum of two years ago.
  3. The tax assessment is a minimum of 240 days old.
  4. The tax return is not fraudulent in any way.
  5. The taxpayer filing bankruptcy and seeking tax debt discharge is not guilty of tax evasion.

Bankruptcy law is very clear about laying out the exact criteria regarding how old a tax debt must be before it may be eligible for discharge. All the requirements must be met for the IRS debt to be eligible. Applying the exact criteria to each year’s tax debt could mean that some unpaid balances are dischargeable while others are not.

Are There Other Rules and Qualifications Regarding Discharge Eligibility for IRS Debt?

Bankruptcy petitioners are also required to prove that their past four years of tax returns have been properly filed before receiving their bankruptcy discharge. The past four years of tax returns have to be filed before the date of the petitioner’s first creditors meeting for the current bankruptcy case. The petitioner is also responsible for providing a copy of their most recent tax return to the trustee. Creditors are allowed to request a copy as well, and if a request is made, the petitioner must provide an additional copy to the creditor.

Do You Have More Questions About IRS Debt and Bankruptcy?

If you have questions about how filing bankruptcy could help with IRS tax debt, or if you need help getting out of debt, don’t hesitate. Call Kenneth C. Rannick P.C., Tennessee, and Georgia bankruptcy attorney. We help good people through bad times.

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