Paying the IRS through a Chapter 13 Bankruptcy Plan

I’ve written elsewhere on my site about IRS Installment Agreements, which are payment plans to repay the IRS over a period of time (usually 72 months if it is a streamlined agreement).  But unfortunately, the IRS continues to impose penalty and interest during the course of the Installment Agreement.

What are the alternatives and how is one to reduce the imposition of penalty and interest?   One option is to file a Chapter 13 bankruptcy in order to repay the IRS (as well as other debts you might have) because unless the IRS filed a tax lien against equity assets, then it cannot charge penalty and interest during the Chapter 13 process.

How a Chapter 13 bankruptcy filing might be able to help you

  1.  potential reduction of IRS tax debt, because the IRS will be forced by the Bankruptcy Code to separate its claim into a “secured” component, and then a “priority” component which usually involves the last 3 years of tax debts, and then a “general unsecured” component which consists of older tax years owed.   Chapter 13 filers are required to pay the secured and priority portions of their IRS claims in full over a 5 year period.   But they are only required to pay on the general unsecured portion according to their ability to pay.   Therefore, a Chapter 13 filer with limited income might be able to pay 0% towards the older years, but at the end of the case, the balances are discharged (wiped out) in full.   Obviously, this is a huge benefit to someone considering a bankruptcy filing;
  2. if you have high IRS balances owed (more than $50,000), then a Chapter 13 filing will prevent the IRS from scrutinizing your income and expenses.   As a  general rule, the Bankruptcy Trustee and Bankruptcy Court are less likely to question your monthly household budget;
  3. elimination of IRS interest and reduction of penalty while in the bankruptcy, and
  4. there is an “automatic stay” from the Bankruptcy Court that prevents the IRS from doing any enforced collections against a bankruptcy filer.   Believe it or not, but someone with IRS debts who has filed a bankruptcy case will usually be permitted to keep their IRS tax refunds while in the bankruptcy case.
  5. the final big advantage to filing a Chapter 13 bankruptcy case is that the Chapter 13 payment plan will be designed to pay off other debts as well.   In other words, if you are struggling with credit card payments or a car or mortgage payment, then the Chapter 13 plan can help you catch up on those debts as well

In sum, there can be many advantages to filing a Chapter 13 bankruptcy case in order to pay off the IRS.  For each taxpayer though, this is an individual decision that must be evaluated closely after examining all of their debts.

9 Comments on “Paying the IRS through a Chapter 13 Bankruptcy Plan”

    1. Yes the IRS can indeed collect on the penalty and interest after a Chapter 13 plan has been successfully completed. The tax has been paid but you should call the IRS to ask for a payment plan. Also ask for first time penalty abatement and they might remove the penalty from the oldest year.

    2. Sorry but I did not see your comment earlier. The IRS is indeed known for collecting some interest on income taxes after the Chapter 13 discharge. I don’t always see it happen in every one of my cases though, and when they do request it, it’s usually not a large amount of money.

  1. What if u filed a chapter 13 and the irs took your taxes but your balance that u owed in your chapter 13 didn’t adjust and they paid the full amount…..will u get any of the money u paid twice back?

    1. Kim, Your attorney should contact the IRS Bankruptcy Unit to inform them that they illegally took your tax refund and applied it to their debt. You should not have to pay twice. Either the IRS would be forced to pay back the money that they seized illegally, or they would reduce their claim in your bankruptcy case. The IRS can’t have it both ways. Good luck.

  2. A friend has offered to payoff my IRS debt but it is included in my Chapter 13 debt and I’ve only been in bankruptcy for 9 months. What can I do to apply tii hi s lump sum toward paying off the IRS? Would I need to drop my Chapter 13 and payoff IRS and then file chapter 13 agin?

    1. Hi, it’s hard for me to say which path you should take, but remember that when you are in bankruptcy, the IRS becomes a less fierce adversary, because the IRS and other taxing bodies have to follow Bankruptcy Court rules during your case. It’s possible that your IRS debt could be comprised of 3 different classes of debt (secured, priority and unsecured). So, why would you necessarily want to pay off the IRS unsecured debt, because at the end of your case, it would be wiped out in full anyway?
      So without knowing more facts about your case, I would say that you should approach this whole idea with a lot of caution. If your Chapter 13 payment plan has been approved by the Court, and you are up to date with your payments, then you should be fine, and you can simply continue on with your case without worrying about the IRS. Good luck however.

  3. I’m in the process of filing for chapter 13 for my irs debt. I am a part owner of a small corporation. Will my business and business partners be in jeopardy even though it is just my taxes I owe?

    1. It’s hard to say for sure without knowing more facts of your case. Chapter 13 is generally a good way to protect your assets. I would think that the measured and controlled process of Chapter 13 will be much better than not filing. Remember that Chapter 13 is a consensual process with your creditors. If the Chapter 13 Trustee objects to your payment plan, it’s usually beCause you aren’t paying enough to your unsecured creditors. So in that case, you simply propose to pay them a higher percentage. So as a general response, I would think that your business partners should be fine.

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