Chapter 13 bankruptcy provides some relief for tax penalties, as it can reduce them to a certain extent. In fact, it completely discharges all unsecured tax penalties, regardless of how long ago they were incurred. On the other hand, Chapter 7 bankruptcy does not have any impact on tax penalties. This applies only to penalties associated with taxes that can be discharged. While this is a positive outcome, it’s important to note that if you’re eligible for Chapter 13 bankruptcy, it’s the preferable option as it ensures that all penalties are dismissed.
Who Can File Chapter 13?
Individuals can apply for Chapter 13 if their debts are less than $2.75M. It doesn’t matter how you divide your debt between secured and unsecured claims.
Because they are government debts, tax liens do not go to the top of the line. They are behind all other lien holders who have a lien before the tax lien.
Taxes Must Be Paid in the Most Recent Tax Year
The person filing the bankruptcy case is the one who writes the Chapter 13 plan. However, the Bankruptcy Code stipulates that all income taxes paid within the plan must be paid.
Penalties are treated in the same way as personal loans and medical bills: in the best interest of creditors and the m test drive that the Chapter 13 plan gives to each class of creditors. Most Chapter 13 plans have little or no penalty.
Chapter 13 reduces these penalties to a manageable size.
Reduced Tax Liens
This discussion pertains to tax penalties and unsecured taxes, but it’s important to note that the rules change when a tax lien is filed. Moving on, Chapter 7 bankruptcy provides the most straightforward form of discharge. It allows the IRS to halt any levies on your bank account or wage garnishments for taxes that have already been paid. However, it’s important to understand that Chapter 7 discharge does not have any impact on tax liens that were recorded before filing for bankruptcy. Any liens that were still in effect after the bankruptcy filing closed can be removed only if the tax liability has been discharged.
This article was written by Alla Tenina. Alla is a top San Fernando Valley bankruptcy lawyer, and the founder of Tenina Law. She has experience in bankruptcies, real estate planning, and complex tax matters. The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only. Information on this website may not constitute the most up-to-date legal or other information. This website contains links to other third-party websites. Such links are only for the convenience of the reader, user or browser; the ABA and its members do not recommend or endorse the contents of the third-party sites.
