NATIONAL
DIVORCE & BANKRUPTCY CENTER
NATIONAL
DIVORCE & BANKRUPTCY CENTER
FILING BANKRUPTCY IMMEDIATELY STOPS: Debtors get much needed 'breathing room' and discharge or reorganize (chapter 13):
The automatic stay provided by filing a chapter 7 or 13 bankruptcy stopes collection actions by taxing agencies, including garnishment and seizure of property. Some taxes and penalties are dischargeable. Those taxes that are not dischargeable can be paid without interest in a chapter 13.
Income taxes:
Taxes that were first due within 3 years of the bankruptcy and taxes assessed within 240 days of the bankruptcy, or which are unassessed but assessable when the case is filed are priority claims which are not subject to discharge. Priority taxes will survive a Chapter 7 discharge. (Note: federal income taxes are due on April 110th of each year - not Dec. 31st).
Such taxes must be paid in full through the chapter 13 plan however penalties associated with those taxes can be treated as a non priority claim and paid a fraction of what is owed along with other unsecured claims. In chapter 13, the tax does not continue to incur interest during the case; if the plan is completed, no post filing interest is due.
Unfiled Tax Returns:
When no return has been filed, or has been filed within 2 years of the bankruptcy, the taxes cannot be discharged in Chapter 7, but can be discharged in Chapter 13 if th etax was first due more than three years before the commencement of the bankruptcy case and was not assesed within 240 days of the filing.
The debtor can expect to prepare and file the returns for the priority tax years.
Filing a return constitutes an assessment of the tax. Filing a return on the eve of bankruptcy for a year long past could make a tax that is otherwise dischargeable in Chapter 13 into a priority debts for at least the first 240 days from assessment! (Proceed with professional advice).
[Take note that this provision of the Bankruptcy Code that allows non filing debtors to get back into the tax system through filing a Chapter 13 may be threatened in the pending changes to bankruptcy laws being debated by Congress.]
Trust Fund Taxes (Withheld from Employees):
Liability for trust fund taxes (that portion of an employee's wages that a employer withholds from employee's checks) is not dischargeable.
An employer, or a responsible person for a corporation or partnership that withheld funds from an employee and failed to pay the appropriate taxing agency, the employer, or a responsible person may have personal liability for the taxes withheld.
Trust fund taxes or the penalty assessed against a responsible party can be paid through a Chapter 13 plan.
The employer's portion of employment taxes can be discharged if it is not a riority tax or a trust fund tax.
Trust Fund vs. Excise Taxes:
In some states, sales taxes are also trust fund taxes. In other states they are excise taxes. Excise taxes become dischargeable with time - trust fund taxes do not become dischargeable reagardless of age.
Tax Penalties:
Whether or not unsecured tax penalties in bankruptcy are dischargeability depends on whether or not the tax they are tied to are dischargeable.
Chapter 7: Tax Penalties:
Penalties associated with priority (nondischargeable) taxes are not dischargeable.
Penalties relatied to dischargeabile taxes are dischargeable, too.
Penalties associated with taxes areising more than three years before the banckruptcy are dischargeable, even if the tax to which it is linked isn't dischargeable.
Chapter 13: Tax Penalties:
All unsecured penalties are dischargeable. Penalties can be paid at the same rate as non tax claims, usually a fraction on the dollar.
(Note: This is only a very brief summary of the effects of bankruptcy on taxes. Consult a tax professional for specific detailed information.)
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