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Tax debt and Chapter 13 bankruptcy

On Behalf of | Nov 16, 2022 | Chapter 13 Bankruptcy, Tax Debt

One of the most common factors that piles on to lead people to file for bankruptcy in California is tax debt. Unfortunately, this is one of the types of debt that is generally not dischargeable. One advantage of Chapter 13 bankruptcy is that is may allow people to meet their tax obligations on a more advantageous schedule than an IRS payment plan.

Treatment of existing tax payment plan in Chapter 13

Sometimes when people file for Chapter 13 bankruptcy protection, they already have a payment plan in place for tax debts. The bankruptcy process will usually reorganize that debt and it will be paid by the terms of the Chapter 13 plan rather than the IRS plan. Some potential advantages of this arrangement are that the debtor may have more time to pay through Chapter 13, the bankruptcy might stop additional IRS penalties, and the Chapter 13 automatic stay will stop IRS collection actions on filing.

Income taxes during bankruptcy

During the course of a Chapter 13 bankruptcy, people must stay current on all tax return filings. A failure to do so may result in the dismissal of the bankruptcy case. Taxes that become due after the bankruptcy plan is in place must be kept up to date. They cannot be added to the bankruptcy plan.

Tax debts arising during bankruptcy

It’s a good idea to make sure that your automatic withholding for taxes is sufficient to avoid owing taxes at the end of the year before you file for bankruptcy. If a person owes taxes during a Chapter 13 case, it may be possible to get permission from the IRS to pay the tax debt with an installment plan.