Income Taxes in Bankruptcy
This is a very short and limited explanation of how income taxes are dealt with in bankruptcy. There are numerous exceptions and variations of the law.
The bankruptcy laws pertaining to state and federal income taxes are basically the same. Income taxes may be classified as priority debt, unsecured or secured. Depending on the circumstances, it may be possible for a portion of the income tax debt to be classified as secured and/or unsecured and/or priority. The income taxes are analyzed separately for each year. Please note that taxes are typically due on April 15th of the following year, unless an extension applies.
A very limited explanation of how to determine the classification of each years income tax liability is as follows.
A Credit card debt is an unsecured debt. Income taxes are deemed classified as unsecured, like credit card debt, if all of the criteria are met:
- A particular year’s income tax return was due more than 3 years prior to the bankruptcy filing;
- The returns for such year was filed more than 2 years prior to the bankruptcy filing;
- The income taxes for such year was assessed more than 240 days prior to the bankruptcy filing;
- No tax lien was filed for such year.
Income taxes are deemed classified as priority if any of the following criteria are met:
- a particular year’s income tax return was due less than 3 years prior to the bankruptcy filing;
- The returns for such year was filed less than 2 years prior to the bankruptcy filing;
- The income taxes for such year was assessed less than 240 days prior to the bankruptcy filing;
Income taxes are deemed classified as secured under any scenario, if the taxing authority filed a tax lien against the debtor.
The portion of the tax that is classified as unsecured is dischargeable and eliminated in a chapter 7. However, depending on the debtor’s financial situation, a chapter 13 may possibly permit the debtor to discharge or eliminate some or all of his unsecured income tax debt. Any income tax unsecured debt that is not paid in the chapter 13 is discharged and eliminated.
Priority income taxes can never be discharged or eliminated in a chapter 7 or chapter 13. This means that a chapter 7 discharge will not eliminate any portion of priority income taxes, which continue to be due and owing. Any priority income taxes due at the time of the chapter 13 filing, must be paid through the chapter 13 plan.
The following relates to an income tax liability that is classified as secured. With regard to a secured claim in a chapter 7, the taxing authority will be permitted to keep their secured lien against the debtors’ personal and real property, after the discharge. In a chapter 13, the debtor must pay the amount of the taxing authorities’ secured interest amount through the plan. However, the debtor may reduce the amount of the secured interest to the value of the debtor’s real and personal property, at the time of the filing.
Expert bankruptcy attorney in New Jersey, Robert Manchel, can be reached at 1 (866) 503-5655 to discuss your tax issues and questions about seeking bankruptcy protection.