If you were to file a Chapter 7 bankruptcy, you would still owe that debt after receiving your Chapter 7 bankruptcy discharge.
Chapter 13 bankruptcies are different, though, because you are in a 3-5 year payment plan towards your debts. The tax debt that would have survived your Chapter 7 bankruptcy discharge is instead paid in full in your Chapter 13 payment plan. The bankruptcy code considers this tax debt to be priority debt in your Chapter 13, which ultimately means it gets paid before anything else gets paid. It takes priority over your general unsecured debts, like credit cards and medical bills.
Paying off the tax debt through a Chapter 13 is a great way to tackle tax debt if you can afford the payments. For some people, the amount of priority tax debt they have is too much to be paid off in 3-5 years with their current income. For many, though, being able to stop the interest and penalties from accruing on the tax debt and paying it off through a 3-5 year Chapter 13 is a really smart financial decision. It is especially smart, because while you are in a payment plan tackling your tax debt, you also happen to be getting rid of all of your credit cards, personal loans, and medical bills (to name a few).
Please note: after receiving a Chapter 13 bankruptcy discharge, it is possible to still have some tax debt left over. That is because there are certain types of tax debt that are non-dischargeable, but also non-priority. This is mainly tax penalties from older tax debt (filed more than 3 years ago). If any portion of these penalties is not paid in the Chapter 13, you will want to get into a payment plan directly with the IRS when your Chapter 13 has ended. This is typically a really nominal amount for my Eden Prairie, MN clients and nothing they cannot handle.
Kain & Scott’s experienced bankruptcy attorneys know how to help Minnesotans struggling with tax debt. If you are interested in learning more about how bankruptcy can help with tax debt, reach out to Minnesota’s nicest bankruptcy law firm by going now to www.kainscott.com. You will be thankful you did.