Can I Include Tax Debts in Chapter 13 Bankruptcy in Arizona?

Tax Debts

If you are overwhelmed with tax debts and looking for solutions, you may have already considered bankruptcy as an option. One of the most common questions people have when researching bankruptcy is what types of debts they can discharge. In short, you cannot eliminate all amounts you owe. There are public policy reasons that bar you from wiping out some debts. Plus, the structure of the debt may prevent you from eliminating it.

Fortunately, you can include tax debts in Chapter 13 bankruptcy in Arizona if you qualify. Your options are dictated by the US Bankruptcy Code as well as regulations established by the Internal Revenue Service (IRS). The requirements to deal with taxes in Chapter 13 are strict, and you can certainly expect that the government does not take nonpayment lightly. As you may know, Chapter 13 restructures your debt into a lower amount paid to the IRS.

Bankruptcy is a complicated process, and seeking to include tax debts in Chapter 13 makes it even more challenging. For the best possible outcome, it is critical to retain an Arizona Chapter 13 bankruptcy attorney who can provide details on your options. You can also review some general information that explains the basics of taxes in Chapter 13 Debt Reorganization.

Overview of Chapter 13 Bankruptcy

Two types of bankruptcy are common for individuals and married couples, and both result in the discharge of qualifying debt. Chapter 13 is a debt reorganization bankruptcy, in which you pay some of what you owe to creditors. Your debts are combined and restructured into a single amount that you pay monthly. Because you must comply with the terms of the debt repayment plan, the primary factor to qualify for Chapter 13 is that you must have a job to pay the monthly amount.

In your debt repayment plan, debts are rolled into the arrangement according to priorities. The duration of the plan is 3 to 5 years depending on your circumstances, and it must be approved by the court. Through the debt repayment plan, you will pay less than the total that you owe. Any remaining debts are discharged at the end of your case. 

Benefits of Filing Chapter 13

The most obvious impact that you will notice right away with Chapter 13 is that you are no longer stressed about your financial situation. Your qualifying debts are erased, enabling you to get a fresh start on solid footing. Creditors can no longer pursue you to collect on a debt. Some of these benefits are also available in Chapter 7 discharge bankruptcy, but there are some critical differences between the two types of cases that make Chapter 13 a good fit for many filers. For instance:

  • With Chapter 7 discharge, you eliminate all debts after the bankruptcy trustee exercises its powers to liquidate. Your assets could be sold to satisfy debt to creditors. In Chapter 13, there is no liquidation.
  • Chapter 7 eligibility rules may be tough to meet if you make too much. Your income must fall under a certain threshold to qualify, so Chapter 7 may not be an option. With Chapter 13 bankruptcy, the key rule is that you must be employed. 
  • Upon filing your Chapter 13 bankruptcy petition, the automatic stay goes into effect. This order from the court prohibits creditors from attempting to collect on your debt.

How Debt Discharge Works in Chapter 13

Both types of bankruptcy are aimed at eliminating unsecured debt, which is a debt you incurred without pledging your assets as security. The most common examples of unsecured debt are credit cards, medical bills, lines of credit, and personal loans. In Chapter 13, these debts are restructured and reduced so that you can pay some amount to creditors before they are discharged.

There are also debts that you cannot discharge in bankruptcy, either in Chapter 7 or Chapter 13. Secured debts, by their nature, are not wiped out in the bankruptcy process. These are debts in which you did provide a security interest to ensure that you pay the loan. Your mortgage is a secured debt, as you use your home as collateral for the funds that you borrow to buy it. If you default on payments, the bank will foreclose on your home to exercise its security interests.

Additional types of debt that cannot be discharged in Chapter 13 bankruptcy include:

  • Alimony;
  • Child support;
  • Judgments from personal injury lawsuits; and,
  • Fees owed to administrative and government agencies.

Most types of taxes are also not able to be wiped out in Chapter 13, but there are special rules for income taxes that provide solutions for many taxpayers. 

Special Treatment for Taxes

When you file for Chapter 13 and have tax debt, the bankruptcy court will notify the IRS that you have indicated the agency to be a creditor that you owe. The IRS regulations on bankruptcy and taxes may apply to your case in one of two ways in terms of bankruptcy discharge:

1. You might qualify to eliminate old tax debt if it is designated as a nonpriority. To be considered nonpriority, some of the criteria include:

  • The debts must be at least 3 years old.
  • You must have filed taxes for the last 2 years before Chapter 13.
  • You must not have committed fraud or intentional evasion.

2. You could roll your tax debt into your Chapter 13 debt repayment plan. This is how you would handle all tax debt that is considered a priority because it cannot be discharged.

Note that Chapter 13 will not be a solution to tax debt if your debt has already been converted into an ownership interest by the IRS, known as a tax lien. Once it becomes a tax lien, you will have to pay the entire amount through your Chapter 13 debt repayment plan. 

Additional Facts About Chapter 13

Once you realize that it is possible to include tax debts in a Chapter 13 case, you should be aware of a few important facts. These points could impact your decision on how to go forward with bankruptcy, and an Arizona bankruptcy attorney can explain how they apply to your situation.

  • When you file Chapter 13 bankruptcy, you can expect your credit score to drop. The bankruptcy case will also remain on your credit report for 7 years, 3 years shorter than a Chapter 7 case.
  • You cannot discharge your mortgage in Chapter 13 because it is a secured debt, but you can leverage some amounts in your debt repayment plan. You can roll in late fees, interest, and other arrearages, and the remainder will be discharged.
  • If you do not move forward with bankruptcy on a timely basis, keep in mind that creditors have options to collect your debt. They can file a collection lawsuit, garnish your wages, or attach property to get payment from you. The automatic stay in bankruptcy prohibits these actions from the day you file your petition. 
  • Despite the effects on your credit, there are strategies to rebuild your score. Even while your case is pending, your record of regular mortgage payments will be reported. You can also obtain a secured loan, in which you deposit an amount with a lender that extends credit to you. 

Steps in the Chapter 13 Process

With bankruptcy matters, some of the most meticulous work, efforts, and strategizing come before you ever file. The most important first decision is whether Chapter 13 is the right fit for you, especially when you would like to include tax debts in some way. You maximize the benefits of bankruptcy when you have guidance from an Arizona Chapter 13 lawyer to assist with:

  • Reviewing and organizing your financial documents;
  • Advising you in the development of the Chapter 13 debt repayment plan;
  • Preparing and filing your bankruptcy petition, along with relevant schedules;
  • Attending the 341(a) Meeting of Creditors with you, where you may be asked questions about your finances, your Chapter 13 petition, and the debt repayment plan;
  • Consulting with you throughout the 3 to 5 years to complete the plan; and,
  • Obtaining the final discharge order from the bankruptcy court.

What to Bring to Your Meeting with an Arizona Bankruptcy Attorney

This information should persuade you of the advantages of having legal representation for your Chapter 13 case and efforts to resolve tax debts. Time is of the essence with bankruptcy, so meeting with a skilled bankruptcy lawyer should be a priority. To make the best of your time and ensure your attorney has access to as many details as possible, you should bring the following:

  • Records related to your income from all sources;
  • Paperwork representing your total debt, both secured and unsecured;
  • Documentation on your monthly expenses;
  • All papers you received regarding creditor action to collect on your debt, if any;
  • Communications from the IRS regarding your tax debt; and,
  • Any other papers you think may be relevant to your discussion about bankruptcy?

Keep in mind that you should also bring this same information as it pertains to your spouse. It will help your attorney advise you on the benefits of filing an individual versus joint petition for Chapter 13. 

Discuss Tax Debts Matters with a Chapter 13 Bankruptcy Lawyer

This summary about tax debts in Chapter 13 bankruptcy in Arizona helps us understand the basics. However, you need knowledgeable legal counsel to ensure you gain the best benefits through a solid debt repayment plan. For more information about the treatment of different types of debt, please contact DebtBusters. You can set up a no-cost consultation by calling (866) 223-4395 or visiting us online. An experienced Chapter 13 attorney will meet with you at our offices in Scottsdale, AZ.

Related Content: Will Bankruptcy Eliminate All My Debts in Arizona?