Bankruptcy Questions Answered

Chapter 13 Trustee Staff Teaches Me How To Defer Some Income Taxes Beyond Five-Year Bankruptcy Plan

As a general rule debtors who file Chapter 13 bankruptcy must pay in full during their bankruptcy plan all of their "priority debts." Priority debts include among other things federal income taxes. Many people file Chapter 13 in order to pay without further interest a federal income tax liability over the course of a five-year bankruptcy plan.

A couple retained me to file Chapter 13 bankruptcy in order to deal primarily with an income tax debt. When we received their income and expense information and prepared a draft bankruptcy plan we found that they did not make enough money to pay all of their priority tax debt in their five-year Chapter 13 plan. We checked with the Chapter 13 trustee’s office to see if there was any way that Chapter 13 could help our clients, and the trustee’s staff said that, in fact, there was an alternative.

The Chapter 13 trustee explained that our bankruptcy judges in Orlando had approved Chapter 13 plans that did not fully pay all priority tax debt when the debtors were paying all of their disposable income into their plan for five years. The court may require also a reasonable payment to unsecured creditors. Taxes not fully paid in the Chapter 13 plan are not discharged by bankruptcy and remain owed and payable to the IRS after the court enters a discharge order at the end of the plan. The exception to the general rule of fully-paid priority claims in found in Section 1322 (a)(4).

I had never encountered a client with this issue. The Chapter 13 trustee office was helpful to me and to my client in this instance. In the Orlando jurisdiction the trustee’s office is the attorney’s best resource to deal solve your clients’ problems in Chapter 13 cases. The Chapter 13 trustee will not prepare your clients’ bankruptcy plans for you or otherwise do the attorney’s job, but they are willing source of assistance if you are unsure about how to handle an issue in a Chapter 13 case.