How Do You Wipe Out Taxes With A Chapter 13 Bankruptcy?
If you have assets you can’t protect in a Chapter 7, you may want to consider a Chapter 13, which will allow you to catch up on your mortgage or car payments and keep your home or car that you could lose in a Chapter 7. Because its reorganization and not liquidation, you can keep everything you own.
A Chapter 13 is a payment plan that can last up to 60 months. It allows you to reduce the penalties and interest you pay the IRS, and when you get a discharge at the end of the Chapter 13 plan, you may be free and clear of all your IRS liabilities.
What’s The Difference Between A Chapter 13 And An Installment Agreement?
While a Chapter 13 and an Installment Agreement (IA) with the IRS may seem similar, this chart sets out some important differences:
How Can No-money-downBankruptcy Help Someone?
Pays newest taxes first
Pay less than full amount
Yes for old taxes
Extends time for IRS to collect
Stops ALL creditors
First, filing a Chapter 13 will stop the IRS – and all your other creditors – from trying to collect from you. Many times, when people are behind with the IRS, they are behind with other creditors and need protection from them as well. An IA with the IRS will only stop the IRS. Moreover, if you end up falling behind in your Chapter 13, creditors will have to get permission from the Court to take action against you. If you fall behind on an IA, the IRS can immediately start collection action again.
Second, a Chapter 13 will stop interest from accruing on your IRS debt. It may also stop or eliminate the penalties the IRS will add to your debt. When you agree to an IA, interest and penalties continue to accrue. In some cases, they are more than your monthly payments, so your IRS debt will continue to grow while you are in the IA.
Third, the IRS is a “priority” debt in bankruptcy. That means it gets paid before other less important debts. Many times, I see people making payments on credit cards, medical bills or payday loans, but not the IRS. This is because these less important creditors are more aggressive than the IRS. They will call you at home or work until you agree to pay, or sue you and get a garnishment. The IRS will almost never call you. (If you get a call from someone claiming to be from the IRS, it is most likely a scam!) The IRS does most of its collecting by mail and according to strict regulations. Thing is, the IRS is the most powerful creditor, with the most far-reaching means of collection, so they’re the ones you really should pay back before all the rest.
Fourth, if you complete your Chapter 13, you will get a discharge and you are done with the IRS. In an IA, you may still owe after you complete your payments.
During both a Chapter 13 and an IA, you must continue to file your taxes. If you fall behind during a Chapter 13, you may be able to add these new taxes to your plan. If you fall behind with the IRS, they may cancel your agreement and start collection actions again.
During a Chapter 13, the statute of limitation will be “tolled” or stopped. During an IA, the statute generally continues to run.
Chapter 13s last 36 to 60 months. IAs can last up to 72 months.
Both the Chapter 13 and the IA look at your income and expenses to determine your monthly payments. The bankruptcy court tends to be more flexible than the IRS in allowing expenses, so you may be better off in Chapter 13 in terms of the amount of your payment. Also, your Chapter 13 plan will deal with ALL of your debts at once, not just the IRS.
What About Maryland Taxes?
The same rules that apply to the IRS, apply to state taxes. Since there is no statute of limitations for Maryland tax debt, bankruptcy may be the ONLY way to get rid of your state tax debt.