Chapter 13 Bankruptcy: Can IRS Debt be Discharged?

Can IRS Debt be Discharged in Chapter 13 Bankruptcy? or Can you file Chapter 13 on IRS? This is the most common question asked by people having difficulties in repaying IRS tax debt. the question. And the answer is Yes , sometimes, IRS debt can be discharged in a Chapter 13 bankruptcy. Filing for bankruptcy under Chapter 13 is a last resort for certain types of taxpayers to get out of tax debt . However, discharging tax debt in bankruptcy can be complex, and whether or not IRS debt can be discharged depends on several factors, including the age of the tax debt, the type of tax debt, and the taxpayer’s compliance with tax laws.

What is Chapter 13?

Chapter 13 is a specific chapter of the United States Bankruptcy Code that provides laws and procedures for individuals to help them overcome tax debts through a reorganization plan to pay back debts while remaining under the bankruptcy court’s protection. So the Chapter 13 bankruptcy law allows individuals with regular income to reorganize their debts and develop a repayment plan over three to five years. It is also known as a wage earner’s plan because it is typically used by individuals who have a regular income but struggle to keep up with their debt payments.

How does it work?

Under Chapter 13 bankruptcy, the debtor proposes a repayment plan to the court that outlines how they will repay their debts throughout the repayment period. The repayment plan must prioritize certain debts, such as taxes and secured debts, and provide for the full payment of all priority debts by the end of the repayment period.

During the repayment period, the debtor makes payments to a court-appointed trustee, who distributes the funds to creditors according to the terms of the repayment plan. Once the repayment period is complete, any remaining eligible debts are discharged, meaning the debtor is no longer legally obligated to repay them.

Benefits of Chapter 13 bankruptcy for tax debt 

Chapter 13 bankruptcy proceedings can be beneficial for individuals who want to avoid foreclosure on their home or repossession of their vehicle, as it allows them to catch up on missed payments throughout the repayment plan. It can also help individuals with high levels of unsecured debt, such as credit card debt or medical bills, as these tax debts may be eligible for discharge at the end of the repayment period.

Not all debts are eligible for discharge under Chapter 13 bankruptcy.

Not all debts are eligible for discharge under Chapter 13 bankruptcy, and the repayment plan must be feasible based on the debtor’s income and expenses. It’s also important to seek the guidance of a qualified bankruptcy attorney to ensure you understand your rights and obligations under Chapter 13 bankruptcy law.

Which types of tax debt are eligible for discharge under Chapter 13?

As per the IRS, only wage earners, the self-employed, and sole proprietor businesses can go for Chapter 13 bankruptcy concerning their tax debts. To be eligible for discharge, the tax debt must meet the following criteria:

1. The tax debt must be income tax debt.
2. The tax debt is at least three years old before the bankruptcy filing.
3. The taxpayer must have filed a tax return for the debt at least two years before the bankruptcy filing.
4. The IRS must have assessed the tax debt at least 240 days before the bankruptcy filing.
5. The taxpayer must not have committed any fraud or willful tax evasion.

If the tax debt meets these criteria, it may be eligible for discharge in a Chapter 13 bankruptcy. However, it’s important to note that not all tax debts are dischargeable, and the bankruptcy court will closely scrutinize the taxpayer’s compliance with tax laws before granting a discharge.

List of debts that can be wiped out under Chapter 13 bankruptcy

Some common types of debts that can be discharged under Chapter 13 bankruptcy:

1. Credit card debt, including any balance owed on credit cards.
2. Any unpaid medical bills, as well as any medical debts that have been turned over to collections, can be discharged under Chapter 13.
3. Personal loans, including loans from friends or family members, can be discharged under Chapter 13 bankruptcy. 
4. Past-due utility bills, such as unpaid electric, gas, or water bills, can be discharged under Chapter 13 bankruptcy. 
5. Payday loans can also be discharged under Chapter 13 bankruptcy. 
6. Certain tax debts.
7. Certain types of judgments, including those related to personal injury lawsuits and those of breach of contract or civil cases, can be discharged under Chapter 13.

What types of IRS tax debt are not dischargeable under Chapter 13?

The following types of tax debts cannot be discharged or eliminated even under the Chapter 13 bankruptcy code, mainly because of strict chapter 13 tax return requirements.

1. If you did not file a tax return for a particular year, any taxes owed could not be discharged through Chapter 13 bankruptcy.
2. Tax debts for which the return was filed within the last two years of filing the Chapter 13 application can not be discharged.
3. Trust fund taxes are taxes withheld from employees’ paychecks for Social Security and Medicare taxes or income taxes. These taxes cannot be discharged through bankruptcy.
4. If a taxpayer was penalized for fraudulently failing to pay taxes or for intentionally underreporting his income, that penalty could not be discharged through bankruptcy.

List of debts that can not be discharged under Chapter 13

1. Tax debts due for less than three years or those resulting from fraud or willful evasion cannot be discharged.
2. Student loans are generally not dischargeable under Chapter 13 bankruptcy, except in cases of undue hardship. However, proving undue hardship is very difficult and requires meeting a strict legal standard.
3. Debts related to child support or spousal support cannot be discharged under Chapter 13 bankruptcy. These obligations must be paid in full under a Chapter 13 repayment plan.
4. Fines and penalties owed to government entities, such as traffic tickets or court fines, cannot be discharged under Chapter 13 bankruptcy.
5. Debts incurred after the bankruptcy case is filed, such as new credit card charges, are generally not dischargeable under Chapter 13 bankruptcy.
6. Any debts not listed in the bankruptcy schedules filed with the court are not dischargeable under Chapter 13 bankruptcy.

Can you get tax refunds during bankruptcy proceedings?

There is no bar to receiving tax refunds during the pending bankruptcy. However, there may be a chance of delayed refunds, or refunds may be adjusted with an outstanding tax or adjusted for the sanctioned bankruptcy plan. In such cases, you can check the refund status by going to our Where’s My Refund tool or contacting the IRS’ Centralized Insolvency Operations Unit at 800-973-0424.

Can chapter 13 take my tax refund?

The answer to this question depends on your repayment plan under approved Chapter 13, your trustee, and how much debt you’re paying; you might be able to keep your income tax refund if:

• Keeping refunds is part and parcel of your bankruptcy plan.
• You qualify to “excuse” a tax refund turnover.
• 70% of unsecured debts are paid, or
• a “100% plan.” for payment of unsecured debt is applicable in your case.

Can partnerships and corporations file for bankruptcy under Chapter 13?

No, for them, the bankruptcy law under Chapter 7 . Here is a list of bankruptcy chapters and who can file under those chapters.

Bankruptcy Chapter	Who can file?
Chapter 7	Individuals ,Partnerships and corporations a
Chapter 9	A municipality (cities, towns, counties, taxing districts, school districts and others).
Chapter 12	family farmer or family fisherman with a regular annual income.
Chapter 13	Wage earners, self-employed, and sole proprietor businesses
Chapter 15	Foreign representatives for foreign bankruptcy proceedings

What happens when your bankruptcy plan is successful?

If your bankruptcy plan under Chapter 13 gets approval, you will receive an order to discharge the debt. A discharge releases you (the debtor) from personal liability for certain dischargeable debts. Some taxes may be dischargeable. Whether a federal tax debt may be discharged depends on each case’s unique facts and circumstances. Consult your bankruptcy tax attorney to determine which tax debts may be discharged.

Where do you file a Chapter 13 bankruptcy plan?

In the United States, Chapter 13 bankruptcy plans are filed with the bankruptcy court in the federal district where the debtor resides or has their principal place of business. The process typically involves working with an attorney to prepare and file a petition, schedules, and a repayment plan with the court. The court will then review the documents and may hold a hearing to confirm the plan. Once confirmed, the debtor will pay a trustee to distribute the funds to creditors according to the plan’s terms.

Summing Up

The answer to an IRS Debt be Discharged in Chapter 13 Bankruptcy? is a definite yes, provided your application to the court is carefully examined and filed to the fullest satisfaction of the bankruptcy court. It is very technical, and only a good tax debt lawyer having experience in Chapter 13 proceedings can bring a smile to your face with successful Chapter 13 bankruptcy plans.