By Ryan C. Wood
I run across this scenario far too often: finances are strained at home so you decrease your tax withholding on your paycheck. This choice is really just a temporary Band-Aid though. You have a little more money to spend on your expenses but you will end up owing the taxing authorities money when it comes time to file your taxes at the end of the year. If you don’t pay your taxes that are due by April 15 (or whenever taxes are due for that year) you will end up having to pay penalties and interest on top of the taxes owed. So what happens if you encounter this scenario after you have filed for bankruptcy?
Chapter 7 Bankruptcy
The taxes you owe after you file a Chapter 7 bankruptcy case is your own responsibility. One thing to point out is that since your Chapter 7 bankruptcy case eliminated all of your eligible dischargeable unsecured debts you should now have some breathing room to change your withholding back to the correct amount. If you are still struggling to pay your expenses after your Chapter 7 bankruptcy case is filed you need to take a close look at your budget. That may mean cutting down on a lot of expenses you spend your money on.
Chapter 13 Bankruptcy
All taxes that you owe prior to the filing of your Chapter 13 bankruptcy case are included in your Chapter 13 plan. All priority unsecured tax debt (generally taxes that are owed in the most recent three years, filed less than two years ago and assessed more than 240 days ago) will be paid 100% in your plan as a priority unsecured debt and all other tax debt will be treated the same as your general unsecured debt. Please consult bankruptcy lawyers in your jurisdiction regarding your specific circumstances.
The question becomes what happens when you owe taxes after you file your bankruptcy case? First, you need to let your bankruptcy attorney know that you owe taxes. The Chapter 13 plan is a payment plan for all debts you owe prior to filing for bankruptcy and you really should not be incurring new debt. It would be impossible for the trustee to administer your Chapter 13 plan if you continue to incur additional debt while you are repaying your old debt.
Many of our clients that are currently in a Chapter 13 bankruptcy cases ask me how they can pay the additional taxes due when they are committing all their disposable income to pay into their Chapter 13 plan. Again, one thing you should do immediately after filing bankruptcy is to change your withholding back to the correct amount so you do not end up owing more taxes in the future. There are generally two main options to pay the new taxes owed: 1) schedule a payment plan outside your bankruptcy case with the taxing authority and decrease your monthly expenses to afford the monthly payment, and 2) modify your bankruptcy plan to pay the new tax debt for the remainder of your plan.
Under 11 U.S.C. §1305 of the bankruptcy code a proof of claim may be filed for taxes owed to a governmental unit while the bankruptcy case is pending. This is an exception to the rule indicating only pre-petition debts are allowed in the Chapter 13 bankruptcy plan. Section 1305 claims have one slight difference to regular pre-petition tax debt: tax penalties are included in the claim amount and the tax debt is subject to interest in the Chapter 13 plan.
If you need to modify your chapter 13 plan to include additional tax debt you should consult with an experienced bankruptcy attorney in your jurisdiction.