Chapter 13 bankruptcy may allow you to include back taxes, along with certain penalties and fees, in your repayment plan. You’ll typically have three to five years to pay qualifying debts, though the relief available depends on whether your tax debt is classified as priority or non-priority. With guidance from Sasser Law Firm, you can explore how a Chapter 13 plan may help manage IRS debt, pause collections, and create a path toward financial stability.
How Chapter 13 Bankruptcy Treats IRS Debt
If you have IRS debt and other outstanding payments, a Chapter 13 bankruptcy plan won’t erase the debt. Instead, it halts aggressive collection efforts and provides individuals with a structured, court-approved repayment plan. As soon as you file Chapter 13 bankruptcy, you’ll get an automatic stay against levies and garnishments, and the IRS will stop sending collection letters.
As the process continues, the IRS will file a claim alongside any other creditors. Your bankruptcy trustee will use federal bankruptcy rules to distribute the following payments based on priority and your plan’s structure. When you have large outstanding debts, this can help you manage payments while sending money to the creditors with the strongest claims.
Understanding Priority vs. Non-Priority Tax Debt
Different types of tax debt have different rules and priority levels. For example, your priority tax debts will be addressed through your payment plan, and non-priority tax debts might be dischargeable. Priority tax debts must be paid in full but at a set schedule, and these types of tax debts include payroll taxes and recent income taxes (as well as some penalties for late payments or late filings).
However, older income tax debts may be partially discharged. If they meet the criteria for filing dates and assessment timelines, any remaining unpaid balance after your plan ends might be discharged. To determine if your tax debts are priority or non-priority, you’ll need a thorough review of your IRS records and filing dates, as the debt’s age is a big factor.
What Happens to Interest and Penalties During the Repayment Plan?
The principal amount of debt for priority taxes generally must be paid in full. But even for priority taxes, there can be some flexibility regarding your associated interest payments and penalties for late payment. While the late tax payments will continue to accrue interest, you may be able to treat the penalties as non-priority claims depending on how the court handles your case. The non-priority tax debts, such as much older income tax debts, may require partial repayment depending on your current income, financial responsibilities, and other factors.
Filing Chapter 13 bankruptcy does not eliminate your tax debt. It gives you a bit of breathing room by halting aggressive notices and structuring your payments through a court-decided payment plan. However, that plan can make it much easier to approach debt repayment, create a consistent budget, and even discharge some of your non-priority taxes and penalties.
When to Speak With a Bankruptcy Attorney About IRS Debt
If you’re considering bankruptcy as part of your strategy for handling IRS debts, it’s important to understand just how complicated the process is. You’ll need legal guidance to file the right paperwork, navigate the legal system, and meet necessary deadlines. We recommend speaking to a bankruptcy attorney as soon as possible if you’re receiving IRS collection notices, think your debt might be dischargeable, or have questions about several years of back taxes. An attorney can help you decide if Chapter 13 bankruptcy is the right choice for your financial situation.
At Sasser Law Firm, we help individuals in North Carolina understand their options for managing tax debt and navigate the Chapter 13 bankruptcy process. Reach out today to schedule a free consultation and learn how Chapter 13 may apply to your situation.
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