For taxpayers with back taxes, filing for Chapter 13 bankruptcy may be a good option for discharging certain tax debts. This arrangement allows eligible taxpayers to pay their tax liability at a reduced amount. It also provides for the settlement of non-dischargeable tax debts for an extended period.
But what is Chapter 13 bankruptcy all about, and how can it help settle your tax debt? Read on to know more about this debt repayment plan.
What is the Chapter 13 Bankruptcy Plan?
Also known as the wage earner’s plan, the Chapter 13 bankruptcy plan is a repayment plan that allows regular income earners to pay their debts within three to five years.
The plan provides debtors an opportunity to save their homes from foreclosure. It also lets them reschedule secured debts and extend them over the program’s life, reducing the payments they have to make.
A Chapter 13 case begins when the debtor files a petition with the bankruptcy court. Here, the debtor files the petition together with the Chapter 13 bankruptcy plan.
When a bankruptcy case is filed, a court order called “automatic stay” goes into effect. This will stop creditors — including the Internal Revenue Service (IRS) — from starting or continuing collection efforts, including sending the debtor collection letters, filing liens against their property, and garnishing their wages or bank accounts.
The automatic stay can be lifted after a request by a creditor for a “good” reason as determined by the bankruptcy court. Once the bankruptcy case is over, the creditors can resume collection, except for tax debts that have been discharged or settled.
Eligibility for the Chapter 13 Bankruptcy Plan
You must meet the following eligibility criteria to qualify for a Chapter 13 bankruptcy plan:
- You have a regular income
Your income must meet your household expenses and proposed repayment plan.
- You have filed all required tax returns
You must have filed all required tax returns within the last four years. If you’re missing a tax return or two, you can engage tax resolution services to help you file your back tax returns.
- You must be a wage-earner, self-employed, or sole proprietor
Only wage-earning taxpayers — such as employees and self-employed individuals — and sole proprietors are eligible for a Chapter 13 bankruptcy plan.
- Your debt should not exceed the limitations set for bankruptcy cases
The debt limitation for bankruptcy cases filed between April 1, 2022 and March 31, 2025 is $1,395,875 for secured debt and $465,275 for unsecured debt.
Requirements for the Chapter 13 Bankruptcy Plan
When filing a Chapter 13 bankruptcy petition, you must fulfill the following requirements:
- Submission of proof of your ability to pay
You have lesser chances of getting approved for a Chapter 13 bankruptcy plan if your income is too low to cover your proposed payments. You must prove that your disposable income can pay off your monthly minimum payment.
- Submission of Statement of Financial Affairs (SOFA)
This form contains information about your assets, liabilities, expenses, and income. These details will help the court assess your financial situation and determine if you are eligible for a Chapter 13 bankruptcy plan.
- Completion of a credit counseling program
You must complete a credit counseling program with an approved credit counseling agency 180 days before filing for bankruptcy under Chapter 13. The program, which may involve fees, aims to help you evaluate your financial options in settling your debts. You must submit a copy to the court if you have developed a debt repayment plan during the program.
- You must have no prior bankruptcy petitions
A debtor who has filed a bankruptcy petition in the last six months cannot apply for a Chapter 13 bankruptcy plan. The prior petition must have been dismissed due to the debtor’s failure to comply with the court’s orders.
- Submission of other relevant documents
Besides the documents mentioned above, you must also submit the following to the court:
1) A schedule of your current income and expenditures
2) A schedule of your assets and liabilities
3) A schedule of your executory contracts and unexpired leases, if applicable
Can IRS Debts Be Discharged in Chapter 13 Bankruptcy?
Filing for bankruptcy under Chapter 13 may discharge certain tax debts. For these tax liabilities to be discharged, they must meet the following conditions:
- The taxes are charged on gross receipts or business income
- The income taxes must be due at least three years — including valid extensions — before the bankruptcy filing
- You must have filed your tax returns at least two years before filing the bankruptcy petition
- An IRS assessment of your tax liability must have occurred at least 240 days before the bankruptcy filing
- You didn’t commit any tax fraud or tax evasion for the tax year in question
Note that certain tax debts are non-dischargeable. Here are some of the most common priority tax liabilities you might have to pay through your Chapter 13 plan:
- Recent income tax debts that do not meet the non-priority requirements enumerated above
- Taxes you were required to withhold, like payroll taxes
- Property taxes incurred within one year before the bankruptcy filing
- Penalties related to non-dischargeable taxes
- Some excise taxes and customs duties
Overcome Financial Hardships with a Chapter 13 Bankruptcy Plan
Financial hardships can come to anyone anytime — and taxes can add to the burden. Filing a Chapter 13 bankruptcy plan can help you manage your tax liability as long as you meet the specified criteria.
However, dealing with the filing process can be overwhelming. If you need a negotiation expert to help you settle the issue, contact us at Peace of Mind Tax Help. Our team of leading experts in tax negotiation and mediation can help you minimize your tax liability.
Contact us today to learn how we can help settle your tax debt.