The IRS and other taxing bodies have extraordinary powers to place liens against your property and levy bank accounts or wages. If you aren’t able to pay the taxes due in full, you may need a chapter 13 to stop those collection actions. Under the Chapter 13, a plan can be proposed to pay the taxes over an extended period of time, up to five years. Some tax debt may be required to be paid in full as a priority claim and other debt such as penalties and interest may be treated as unsecured. Unsecured debt is paid at the same percentage as the other unsecured creditors under your plan. The Bankruptcy Code is one of the most powerful tools available to debtors when it comes to dealing with the IRS. During your Chapter 13, all interest payments to the IRS are stopped. Prior interest and penalties may be substantially reduced. The benefits of a Chapter 13 should be examined with a skilled bankruptcy attorney. Chapter 13 may have substantial benefits over a standard IRS payment plan which continues to accrue interest during the payment plan.
Upon filing of the bankruptcy case, the court issues an Automatic Stay. This stay stops all collection actions including those of the IRS and other taxing authorities. Additionally, the stay prevents the IRS from filing any liens while your case is pending.
While the filing of a Chapter 7 won’t normally discharge your tax debt, some debt may be discharged. Certain debt that is more than three years old and the returns were filed on time may be discharged. This is a complicated area of the law and a skilled bankruptcy attorney should be consulted to insure the necessary actions are taken.