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Dischargeability Of Taxes: The Only Certainty In Life Is Death And Taxes…Except In Bankruptcy

Dischargeability of Taxes: The only Certainty in Life is Death and Taxes…Except in Bankruptcy

Are your bankruptcy clients paying more money in a Chapter 13 plan than they need to? The Bankruptcy Code gives certain kinds of Chapter 13 claims priority status for distribution and they are non-dischargeable. All creditors are required to file a Proof of Claim with the bankruptcy court if they want to be paid by the trustee. If a claim is not filed, the trustee will not pay the creditor.

Sometimes, creditors are slow at filing a Proof of Claim and risk missing the deadline. That’s why, in some situations, it behooves the debtor to take matters into their own hands. For example, debtors may want to file a Proof of Claim for a car loan or home mortgage when payment of arrears is intended to be paid by the Trustee as part of their Chapter 13 plan. In those cases, the debtor may file the claim on the creditor’s behalf within 30 days after the expiration of the time for filing the claim. See 11 U.S.C. §501(c); Bankruptcy Rule 3005.

But what about income taxes? 

Specifically, those taxes that are due and owing within three years of the filing, where the debtor timely filed a return. If a claim for recent income taxes is filed with the court – those claims are considered priority claims under 11 USC §507(a)(8) and the Bankruptcy Code mandates that they be paid in full.  11 U.S.C. §1322(a)(2).

Here is how to beat the system.

In a Chapter 13 bankruptcy when a debtor is seeking a standard Chapter 13 discharge, if the IRS does not file a Proof of Claim for recent unpaid taxes where it has been duly notified of the bankruptcy, then the income tax debt will be discharged without being paid. That means, a debtor’s counsel should never file a Proof of Claim for these types of  taxes.

It isn’t easy to beat the IRS.

The Bankruptcy Code significantly limits a debtor’s ability to discharge taxes in bankruptcy. A bankruptcy professional has to have an intimate understanding of the Bankruptcy Code. Call Patricia M. Mayer PC for more specifics on how to beat the IRS in bankruptcy cases.

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