You get more control than with Chapter 7 over the amount of your tax payment, who you can pay ahead of taxes, & adjustments to the payments.
The last blog post was about how a Chapter 13 “adjustment of debts” can reduce what you pay in taxes, especially in interests and penalties, and especially if a tax lien has been recorded against you.
Besides paying less, Chapter 13 can also give you a much more convenient package through which to take care of your back taxes. That’s because of the various advantages it provides for controlling the present and the future. Today’s blog post describes four ways it does so.
Advantage #1—More Control Over Your Tax Payment Amount
If you have taxes you owe which are not going to be discharged (legally written off) in a Chapter 7 case, after your case is over you would usually have to pay off those taxes through a monthly payment plan arranged directly with the IRS or state taxing authority. This monthly payment amount may or may not be reasonable since it would be based on the IRS’s/state’s rules, not on your budget. You wouldn’t have any choice—to avoid the IRS’s/state’s aggressive collection tactics, you would have to pay what they require.
Under Chapter 13, in contrast, the amount you pay monthly into your “plan” is not governed by the taxing authorities but rather by your own financial circumstances. Within some limits, it’s based on what you can afford rather than on what the IRS/state demands, often leaving you with more reasonable amounts for your living expenses. The taxing authorities have to work within bankruptcy law just like all the rest of your creditors.
Advantage #2—More Control Over ALL Your Creditors
When you make installment payments for back taxes after a Chapter 7 case, the taxing authorities often do not care about other creditors you still need or want to pay, such as a vehicle loan or child support. So you can end up struggling to keep current on these other crucial obligations in order to pay what the IRS and/or the state require.
Under Chapter 13, in contrast, the plan puts all your debts into a single package, so that you are not forced to satisfy the IRS/state to the detriment of your other important creditors. The tax creditors have to wait their turn to be paid after debts that may be a higher priority for you.
Advantage #3—More Control Over ALL Your Taxes
Chapter 7 deals directly with tax debts that meet the conditions for discharge and does nothing to those that don’t. The discharged debts simply go away forever. The non-discharged ones are unaffected by the Chapter 7 case so you continue to be obligated on them, including the interest and penalties that continue to accrue even while your case is open and active. So after your Chapter 7 case is finished you are on your own in making arrangements to pay off those non-discharged taxes, or to try to settle them at a discount.
Instead, under Chapter 13, your different tax debts are all handled in one package (along with all the rest of your debts).
Within that package, legally distinguishable types of taxes ARE treated differently. The taxes that can’t be discharged are “priority” debts, which need to be paid in full during the 3-to-5-year span of the plan, although usually with no accruing interest or penalties. Dischargeable taxes are generally treated like the rest of your “general unsecured” debts—credit cards, medical bills, and most other debts not secured by any collateral): paid only to the extent there is available money to do so, which is often little or nothing. And if a tax lien has been recorded on a tax debt, all or a portion of that debt must be paid, depending on the value of whatever the lien attached to, usually with modest interest. The advantage is that there are no loose tax ends: at the successful completion of your Chapter 13 case, you will be debt-free and income tax debt-free.
Advantage #4—More Control Over Future Changes in Your Finances
Once you enter into a monthly payment plan with the IRS or state taxing authority after completing a Chapter 7 case, you may be able to change your payment amount but only as permitted within their policies and practices. You are at their mercy.
In contrast, your monthly Chapter 13 plan payment can almost always be adjusted to reflect your changing financial circumstances. And the terms of the plan directing payments to your various creditors can also be adjusted mid-stream to reflect changes both to your circumstances and to your intentions in responding to those circumstances. For example, you may need to reduce (or sometimes increase) your plan payment to reflect income and/or expense changes. Or as a result of those changes, you may want to pay off a non-tax obligation faster (such as a vehicle or child support arrearage). Or if your circumstances change even more radically, you may be able to either convert your case into a Chapter 7 one, or dismiss it (close it), with the possible intention to file a new Chapter 7 or Chapter 13 later to deal with whatever happened in the meantime. Usually the IRS/state would not have grounds to object to these procedures.