Back Taxes Due in a Personal Bankruptcy Situation
Sometimes a taxing entity like a state income tax authority or the IRS can make a mistake on how much tax is due. This can happen before, during or after filing bankruptcy. A similar situation occurred when the state of Oregon made a mistake on taxes on one of its citizens right before the man filed a Chapter 13 and during the first year of the plan.
When the plan was closed, the state of Oregon sent the man a demand for payment within 30 days of the balance. The amount owed claimed by the state amounted to $28,000 including interest and penalties, and that amounted to about 40 percent of what the man had reported on his tax return. The man paid the tax claim during the plan down to $14,500 as part of the Chapter 13. The Oregon debtor wanted to know if this was legal for the state to demand full payment now.
Certain Taxes Exempt from Bankruptcy Discharge
Certain taxes like state income taxes cannot be discharged in a bankruptcy according to bankruptcy laws. They are exempt from bankruptcy discharge.
Once a bankruptcy is filed by a debtor who owes taxes, the taxing authority is prevented from contacting the filing debtor until the bankruptcy is over. The bankruptcy court automatic stay prevents any creditor from contacting a debtor for collections until the bankruptcy is closed. This bankruptcy law includes government creditors as well.
The only contact a creditor can have during a bankruptcy with the debtor is if the creditor were to file a Creditors Objection to force the debtor into bankruptcy court. In this particular case, there was no reason to force the debtor into court because the debtor was already paying on the back taxes through his plan.
Whenever the bankruptcy is closed, a taxing authority has the right to go after any deficiency of the back taxes, regardless whether they made a mistake or not. They can go after the deficiency of back taxes because the taxes are exempt from bankruptcy discharge and the automatic stay is no longer in effect.
Possible Solutions to the Problem
Depending on the circumstances, post petition interest and penalties on back taxes can continue on through a Chapter 13. Even though the bankruptcy court could conceivably discharge the interest and penalties, most likely the $14,500 surviving this particular Chapter 13 could be related to interest and penalties.
If so, a possible solution to the problem could be to negotiate with the state taxing authority a payment plan for the debt still owed. Going through a bankruptcy, unless you can prove undue hardship, it is not likely the state would cut you much slack, but you will not know until you ask.
At this point after bankruptcy, a bankruptcy lawyer will not be able to help you with the debt. If you still feel like fighting the debt, you most likely will need a tax attorney.
- Discharge of Debt in Bankruptcy? (betterbankruptcy.com)
- Bankruptcy and the Adversarial Proceedings (betterbankruptcy.com)
- Bankruptcy Basics: Individual Debt Adjustment in Chapter 13 (betterbankruptcy.com)
- Bankruptcy & IRS Tax: Types, Requirements, & Discharging (backtaxeshelp.com)
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