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.
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%.