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What Is Chapter 13 Bankruptcy and How Does It Impact Tax Debt?

 Posted on January 27, 2024 in Bankruptcy

TX bankruptcy lawyerChapter 13 bankruptcy allows you to restructure your debts into a three to five-year payment plan approved by the bankruptcy court. This type of bankruptcy is often called “wage earner’s bankruptcy” because it is only available to individuals with regular income. The payment plan allows you to catch up on missed payments to creditors while also paying down a portion of your debts under court protection. Your assets are not liquidated like in a Chapter 7 bankruptcy. At the end of your payment plan, eligible debts are discharged. A Texas bankruptcy lawyer can help you navigate this out for your specific situation.

How Tax Debt is Treated in Chapter 13

Most tax debt can be included in your Chapter 13 payment plan. There are a few exceptions for recent tax liability and tax debt from filing fraudulent returns. Generally, Chapter 13 allows you to catch up on federal income tax, self-employment tax, payroll withholding tax, and other types of tax debt across multiple years. Your proposed payment plan must pay these tax debts in full over three to five years to obtain discharge eligibility. If you have not filed tax returns for previous years, you will likely have to file before your Chapter 13 case is approved.

Options for Negotiating Your Tax Debt

In certain circumstances, it may be possible to negotiate an Offer in Compromise or Partial Payment Installment Agreement with the IRS to settle your tax debts for less than the full amount owed. The IRS looks closely at your income, assets, ability to pay, and special circumstances when considering such options. An experienced bankruptcy attorney can advise whether it is better to negotiate directly with the IRS vs. file Chapter 13 based on the details of your unique tax situation. The IRS is not obligated to accept an Offer in Compromise once you file bankruptcy.

Benefits of Including Tax Debt in Chapter 13

The primary benefits of dealing with tax debt through a Chapter 13 case rather than attempting to negotiate with the IRS include:

  • Stop aggressive collection actions like wage garnishment or levies on bank accounts
  • Pay back taxes over time with court protection rather than face anxiety over burdensome tax bills
  • Discharge eligible tax debt at the end of the payment plan for a fresh start
  • Consolidate multiple years and types of tax debt into a single case
  • Pause high-interest accumulation on tax debt during the length of the payment plan

Contact a Parker County, TX Bankruptcy Lawyer

Navigating tax debt issues while also considering bankruptcy leads to challenging legal and financial questions. Working with a Fort Worth, TX bankruptcy attorney can provide you with useful insight. Every situation has nuances around the best way to deal with overwhelming tax obligations. Call Acker Warren P.C. at 817-752-9033 to get started with a free consultation.

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