Owing taxes while in Chapter 13 can feel very challenging for New York residents, especially if you don’t know how this will impact your repayment plan. If you owe taxes during your Chapter 13 repayment plan, there are certain responsibilities you must meet in order to maintain your plan and keep the IRS happy.
At Grady BK, PLLC, our goal is to provide our New York clients with the legal assistance they need as they navigate the bankruptcy process. We understand that Chapter 13 and taxes can feel overwhelming, which is why we strive to provide you with the resources you need to proceed with confidence. We will help you navigate filing for Chapter 13 and your repayment plan, as well as understand your tax obligations throughout this process. In this article, we will be discussing Chapter 13 and tax debt and what this means for your plan.
What Happens to Tax Debt During Chapter 13?
Depending on the type of tax debt and the factors surrounding it, it may be considered to be dischargeable when you start your Chapter 13 repayment plan. However, for this to be the case, it has to meet certain eligibility criteria for the state of New York, including:
- Your tax return was due more than three years before you filed for bankruptcy.
- You filed a late return more than two years before you filed for bankruptcy.
- If the tax return has been assessed, this has been done more than 240 days before you filed for bankruptcy.
- You did not willfully attempt to evade your tax obligations or file a fraudulent return.
If it turns out that your tax debt is not dischargeable, it will be paid through the Chapter 13 repayment plan as one of your prioritized monthly payments. You will be able to discharge penalties that have been assessed, even if the taxes themselves are not dischargeable.
Your Chapter 13 repayment plan will be formulated to fit your income, providing you with monthly payments that are realistic. This can help you to pay off your tax debt over the course of your 3 to 5 year plan, as well as pay back a percent to your other creditors.
Priority and Non-Priority Tax Debts
Not all types of tax debts are treated the same when you file for Chapter 13, which can make your repayment plan look a bit different. Like other types of debts included in your plan, certain types of tax debts may be labeled as priority or general unsecured debt. Here is how these types of tax debts are handled:
- Priority tax debts: This type of tax debt must be paid in full over the course of your repayment plan. This typically includes debts such as your most recent income taxes and all sales tax..
- General unsecured tax debts: This type of tax debt may only need to be paid at a reduced rate and is categorized with other unsecured debts, such as personal loans and credit card balances. General unsecured tax debt includes any income tax debt that isn’t labeled as a priority and is usually only prioritized after your main tax debts have been paid off.
Tax Obligations When Filing For Bankruptcy in New York
Now that you know what to do if you owe taxes during Chapter 13 bankruptcy, you need to be aware of your tax obligations. Even after you file for bankruptcy, you still have certain obligations required by the IRS that you must meet to avoid running into serious complications.
Here are the tax obligations you have when you file for Chapter 13:
- You must file all required tax returns for tax periods that have ended within four years of your bankruptcy case.
- Throughout bankruptcy, you must continue to file all required returns.
- During bankruptcy, you still need to pay all current taxes as they are due.
When you are filing for Chapter 13 in New York, you should also seek the assistance of a bankruptcy attorney. An attorney can help guide you through this process so that you understand your tax obligations and how Chapter 13 will prioritize tax debt. In most cases, this is crucial since every situation is slightly different, and you need to be aware of what bankruptcy means for your taxes.
Consequences of Not Managing Tax Debt During Bankruptcy
Managing taxes and Chapter 13 can come with several different challenges, especially if you run into issues with being able to make your monthly payments. If you find that you’re struggling to keep up with your repayment plan, you need to act quickly and request that your plan be changed to meet your current income.
Failing to make the required monthly payments towards your tax debt could result in your Chapter 13 plan being dismissed. Not only will this reflect poorly on your credit record, but this will leave you vulnerable to creditors as you are no longer protected by the bankruptcy.
If you aren’t following your repayment plan, this can also lead to repercussions from the IRS. The IRS may initiate a tax lien and may start to make collection efforts. Falling behind on your tax payments can also lead to extensive penalties that can start to add up quite quickly.
New York’s Top Compassionate Bankruptcy Attorney
If you are filing for Chapter 13 bankruptcy in New York, there is a possibility that you may owe taxes. At Grady BK, PLLC, we can help guide you through the bankruptcy process and navigate what this means if you have tax debt. Having a New York attorney on your side can help you proceed with confidence so that you know what your options are.
At Grady BK, PLLC, we are here to help our clients every step of the way, providing a personalized and attentive approach. We will tailor our services to fit the specific needs of your bankruptcy case so that you understand what to expect.
Contact us today at 315-299-9005 to discuss your financial situation with a bankruptcy attorney in New York. Our team at Grady BK, PLLC, is here to provide you with the legal assistance you need as you navigate Chapter 13.
