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Bankruptcy in Brief

             a service of the Moran Law Group

superceded by provisions of BAPCPA, effective for cases file on or after 10/17/05.

Taxes in Chapter 13: put up or shut up

One of the most powerful attributes of Chapter 13 is its treatment of tax liabilities for which the taxing authorities don't file a claim:

if no claim is filed,  the tax is discharged upon completion of the plan, even though under no other legal theory could the debtor escape liability without payment!*

Chapter 13 can therefore be used to make the taxing authorities come forth and assert any claims they have, or risk being discharged. 

Trust fund tax liability  

This may be particularly powerful where individual corporate officers may have liability for unpaid trust fund taxes which has not been assessed against the individuals.   

If the taxing authority does not file a claim within the time period set out in  law (6 months from filing) then the taxing authority loses its rights to assess or collect the tax after the Chapter 13 discharge.  

In our experience, the IRS is not particularly efficient in matching the trust fund liability of a corporate or partnership entity with the bankruptcy case of an individual who may be liable for that tax if properly assessed.  

If a claim is filed, the debtor can pay it according to the priority of the tax and the terms of the plan. If the amount of the tax is too large to be paid from projected income, the debtor is free to dismiss the bankruptcy and pursue an offer in compromise with the taxing authorities.

If there is a dispute about the calculation of the tax or the debtor's liability for the tax, the bankruptcy court has jurisdiction to hear and decide the dispute, usually quicker and at less expense than a suit in Tax Court.

  Overview of Chapter 13

  Tax FAQs

  Tax relief in bankruptcy


 *Tax liens are an exception:  they survive the bankruptcy, regardless of whether a claim is filed, unless paid through the case or avoided as not attaching to value at the commencement of the case.

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