Chapter 13- Under-appreciated tax tool
Chapter 13 of the Bankruptcy Code offers powerful and inexpensive solutions for the individual with tax troubles. The debtor can
In contrast to installment plans and offers in compromise, Chapter 13 plans need only to meet statutory requirements to be accepted by the court, require minimal paper work, and are arbitrated by a judge in the event of disagreements between debtor and taxing authority.
A working knowledge of Chapter 13 allows tax professionals to evaluate all the options for their tax delinquent clients.
Overview of Chapter 13
Chapter 13 is a repayment plan, available only to individuals with regular income and debts below statutory caps. The debtor proposes a repayment plan based on his actual and reasonable current living expenses; when approved by the court, the plan binds all creditors to accept its terms as payment in full of their claim.
The Plan The debtor constructs a plan for monthly payments to the Chapter 13 trustee extending over a minimum of three and a maximum of five years. Whether unsecured creditors get nothing, a fraction, or all of their claim is a function of the disposable income available to the debtor after payment of current living and business expenses, the size of the priority claims which must be paid ahead of unsecured creditors; and the value of the debtor=s non exempt property.
Plan Confirmation To be confirmed a plan must be proposed in good faith and must meet certain statutory tests:
Confirmation does not require creditor approval; creditors in Chapter 13 are limited to objecting on the grounds that the plan does not satisfy the statutory requirements for confirmation. Thus, in effect, there is a presumption that the plan will be confirmed, which the creditor must refute.
Taxing authorities have no greater voice in Chapter 13 than any other creditor.
Taxes in 13
The priority amount includes the tax and the interest to the date of filing on the tax; penalties associated with a priority tax are not priority claims and are treated just as any other unsecured debt, which means they may get little or nothing through the plan.
Interest on all unsecured claims in bankruptcy stops running upon the filing of the case. Unsecured priority taxes are paid, then, without interest accruing after the filing of the bankruptcy.
The bankruptcy court also has jurisdiction to decide tax disputes related to Chapter 13 cases.
Taxes discharged Non priority taxes, unpaid interest and tax penalties, are discharged at the completion of the plan. The exception deals with tax years more than three years old for which a return has not been on file for two years: under BAPCPA, those taxes are neither discharged nor paid as priority, unless they were assessed within 240 days of the filing.
Tax liens Liens in Chapter 13 are valued as of the commencement of the case, and generally paid through the plan, so that the debtor emerges from bankruptcy entitled to a release of lien for all taxes of record. The value of the lien that must be paid through the plan is the present value of the equity in the debtor=s assets to which the lien attaches.
If the lien exceeds the value of the assets available to secure the tax, the portion of the tax exceeding the value of the assets is treated as either a priority claim, if recent, or an unsecured claim, if older.
The result is that tax liens that have grown huge over years can be stripped down to the actual value of current assets, locked in as to value as of the commencement of the case, and paid over 3-5 years through the Chapter 13 plan. After the bankruptcy discharge, the pre filing lien does not attach to newly acquired property.
How should tax professionals love Chapter 13? Let=s count the ways:
Bankruptcy should not be the first choice for the delinquent tax payer, but it may offer significant advantages over installment plans and offers in compromise for the client with tax troubles.
2. Debt limits for Chapter 13 are $1,010,650 in secured debt and $336,900 in unsecured debt. They are adjusted every three years.
3. Defined at 11 U.S.C. 507(a)(8)
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