Debtors who file Chapter 13 bankruptcy will repay their debts partially or in full over a course of three to five years. Depending on their circumstances, they may be able to partially discharge their federal or state taxes. Below are a few rules debtors in Chapter 13 bankruptcy should know about tax debt:
- Tax debts generally are considered priority debts which must be paid 100% but there are cases when a tax debt loses its priority status. If a tax debt is older than 3 years old at the time that the debtor files Chapter 13 bankruptcy, it may be classified as a non-priority debt. However, a debt that is older than 3 years old may fall into the priority debt category if the debtor filed an extension or an offer to compromise on the tax debt prior to filing Chapter 13 bankruptcy.
- If a tax debt is older than three years old at the time of the Chapter 13 bankruptcy filing, the tax debt may be classified as a general unsecured claim. If the tax debt is considered a general unsecured claim, the debtor may be allowed to pay anywhere between 0% to 100% of the debt in Chapter 13 bankruptcy depending on their ability to pay.
- If a tax debt is secured by a lien, then that debt will be considered a secured debt and covered by the value of whatever property it is attached to. Secured tax debt cannot be discharged in bankruptcy and must be paid 100% generally speaking. For example, if a tax debt was secured by a lien on a debtor's home, then that tax debt would not be dischargeable in bankruptcy and it must be repaid 100%.