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Can Chapter 13 bankruptcy remove tax debt?

| Apr 22, 2021 | Chapter 13 Bankruptcy |

Bankruptcy is a legal process that helps Illinois consumers to regain financial freedom by removing some debts. Individuals who file Chapter 13 have the chance to repay all or most of their debt through a self-devised plan that must be court-approved. However, not all debts that remain can get discharged, and tax obligations can be tricky.

Priority tax debt and nonpriority tax debt

Priority tax debt can’t be erased under Chapter 13, which means the consumer must pay them before anything else. Examples of priority tax debt include income tax not removable under nonpriority debt, sales tax, overpayment of tax refunds, some employment and excise taxes, and property tax. Individuals cannot discharge secured tax debt, such as current property taxes occurring within a year of filing or tax liens.

Nonpriority tax debt includes older debts that meet certain conditions to get discharged. This includes non-fraudulent tax returns, a filed return for the taxes owed, and tax debts more than three years old. If the individual filed after the year they owe, they’ll have to wait three years.

Other considerations

Dischargeable tax debts won’t accrue interest, but non-dischargeable tax debt will. Those in bankruptcy must still file current income tax returns on time, or it could cause the case to get dismissed.

One benefit of filing bankruptcy is the automatic stay, which means creditors cannot contact the consumer about the debt or take further collection action. The IRS must accept the repayment plan as long as the individual meets payment obligations.

Chapter 13 offers consumers a way to repay some of the debts, but not everyone qualifies for this type. Bankruptcy laws are often complex, so someone considering Chapter 13 should seek advice from an attorney.