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Dealing with Income Tax Debts under Chapter 13

A Chapter 13 “adjustment of debts” bankruptcy will allow you to pay off back income taxes over a three-to-five year period, frequently without incurring any additional interest or penalties, and even sometimes paying less of the tax itself.

Power Against the IRS/New Jersey Division of Taxation

Consumers file a Chapter 13 case instead of a “straight bankruptcy” Chapter 7 one for many reasons. Owing back income taxes is a major one. If you owe a lot of taxes, the significant advantages that it gives you over Chapter 7 would likely be reason enough to look closely at Chapter 13.

To be clear, Chapter 7 CAN discharge (write off) income taxes that are old enough and meet a number of conditions. But especially if you owe taxes for more than one tax year and/or you owe on recent tax year(s), Chapter 13 is likely your best option. One of the main reasons is that under Chapter 7 you are at the mercy of the IRS as you deal with them about any income tax debts that don’t meet the conditions for being discharged. Chapter 13 gives you some extremely helpful tools for getting control over those tax debts, while continuously protecting you from the IRS and the New Jersey Division of Taxation.

Protection from the IRS/New Jersey Division of Taxation

From the moment your Chapter 13 case is filed, you and your assets are protected from the IRS’s and Division of Taxation’s collection efforts, up until the time you are tax debt-free. The “automatic stay” which stops all your creditors from pursuing you applies just as powerfully against all the taxing authorities. And although this protection is in place in Chapter 7 cases as well, there it only lasts about three or four months, and expires generally before you even start dealing with the IRS/New Jersey about the debts that were not discharged. In Chapter 13 that protection lasts throughout the three-to-five year case. That’s huge: no threat of garnishment, tax levies on your property, no tax liens on your home or vehicle, and no phone calls from the IRS/Division of Taxation throughout that time.

Advantages under Chapter 13

Chapter 13 can handle all of your income tax debts in one tidy package.

For bankruptcy purposes you can have three kinds of income taxes, depending on their age and other conditions.

There are those that are old enough and meet some other conditions so that they would be discharged in a Chapter 7 case. Under Chapter 13 these are lumped in with all your other “general unsecured” creditors—credit cards, medical debts, and such—and are only paid to the extent that you have available money to do so during the course of your case.

The newer, nondischargeable taxes are “priority” debts, meaning that the tax itself has to be paid in full during your Chapter 13 case. BUT usually interest and penalties do not accrue throughout the payment period. That alone could potentially save you thousands of dollars.

You might also have a third category of income tax, IF the IRS/New Jersey recorded a tax lien. Then whatever that lien attached to is in effect collateral on that debt. Chapter 13 often handles these much better than otherwise, because, first, the IRS/Division of Taxation can’t exercise its lien rights by foreclosing on and seizing your assets. And second, Chapter 13 provides a great mechanism for valuing that lien and paying it off so that it must be released at the completion of your case.

At the end of your successful Chapter 13 case you would owe nothing to the IRS, New Jersey, or any other tax authority, and would usually be debt-free altogether.

Contact the Law Office of Andrew B. Finberg

If this sounds attractive to you, and you live or operate a business in New Jersey, we can help you determine what Chapter 13 can do for you and your income tax debts. Come in to see us for a free, no-obligation consultation. Please call (856) 988-9055 or use this form to contact your New Jersey bankruptcy attorneys at the Law Office of Andrew B. Finberg, LLC.

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