Chapter 13 IRS Tax Bankruptcy Requirements & Details

IRS Chapter 7 BankruptcyWith a Chapter 13 bankruptcy, IRS taxes rarely are discharged (unlike with a Chapter 7) but instead repaid through the use of a payment plan that lasts anywhere from three to five years. If your income falls below your State's median income the repayment term is three years, otherwise five. With Chapter 13, sometimes your payment plan may equate to you paying less you owed but this not always the case.

The major advantage of a Chapter 13 bankruptcy is you do not need to liquidate or sell any assets as the payment plan is backed by your income. Moreover, if the IRS rejected a payment plan for you, this can sometimes be the way you get them to accept one.

Two disadvantages are that it can cost you much more in terms of credit degradation and in terms of fees (upwards of 10k). Moreover, Credit Counseling must be completed and sometimes the IRS is given a longer period of time to collect the taxes from you.  It is intended for individuals (married) and not businesses. Just like a Chapter 7 bankruptcy, you will have to meet certain requirements or conditions.

Chapter 13 Bankruptcy Requirements

The IRS will discharge very little or none of your IRS taxes through a Chapter 13 bankruptcy but instead provide a "means" or payment plan. Here are some important things to know:

  • Proof You Can Pay - You will need to show that you can pay at least $100 dollars a month if anything and show that you have the disposable income to meet the monthly minimum payment on a payment plan.

  • Not Too Much Debt - You cannot file for Chapter 13 if you have more than about $336,900 in non-collateralized (or not secured) debt, and no more than $1,010,650 in secured debt (collateralized debt such as mortgage, car loan etc). These limits change with the CPI and are not relative to IRS taxes owed.

  • Statement of Financial Affairs- You will need to fill a petition and Statement of Financial Affairs which will show your assets, liabilities, expenses, and income.

  • Credit Counseling by US Gov Agency - Before you can file for Chapter 13, you will need to complete a credit counseling course with a US government agency (for a fee in most cases).

  • Individuals (or sole proprietor) not Businesses - Only individual taxpayers can apply for Chapter 13.

  • Last 4 Years of Tax Returns Filed - You need to file taxes for the last 4 years in order to qualify. If you haven't, work with a tax professional or CPA to get this done or you can do it yourself.
  • Must File Restructure and Repayment Plan - You will need to file a petition and plan to restructure or repay your debts.

It is recommended here that you speak with a tax attorney or bankruptcy attorney when considering Chapter 13. Unfiled tax returns, the Statement of Financial Affairs, the restructuring and payment plan can be difficult and time consuming.  The Statement of Financial Affairs can be complex because it must give the courts an accurate snapshot of your financial situation. In addition, the proposed payment plan must spell out what creditors will be paid (student loans, taxes, child support cannot typically be discharged), and at what interest rates are given among other things. A court appointed trustee will review the plan and your creditors must agree to it. If you complete the bankruptcy repayment plan (after 3-5 years), the remaining debt (other than taxes) will be discharged.

In summary, Chapter 13 is not something you always want to pursue if you want to discharge or remove taxes owed (because they are rarely discharged). Do not forget that its requirements can be cumbersome and it halts the time clock on the IRS to collect until bankruptcy is over (that is if you still owe after bankruptcy).Chapter 13 can be pursued if you don't qualify for Chapter 7 or you don't want to liquidate non-exempt assets. For example, exempt-assets would be equity in your home, 401ks and IRAs, public benefits, insurance and so on. Remember, usually it is your state that determines what assets are exempt and non-exempt.