When a debtor files a Chapter 13 bankruptcy, he/she is required to pay in full over the life of the payment plan any taxes that are non-dischargeable, which are known as “priority” taxes. If a debtor has taxes that do meet the criteria for discharge, then some of those might get paid during the bankruptcy but often very little of that gets paid and is simply discharged at the end of the case.
After Chapter 13 is over, however, it would not be uncommon for the debtor to receive a notice from the IRS or the state Department of Revenue indicating that some taxes are still owed.
Debtors will sometimes call up quite upset about still having to owe some taxes for the tax debt they had paid off during the bankruptcy.
So, how can this happen?
The answer is: Interest accrues outside of the bankruptcy for the taxes that are not dischargeable.
Interest on the dischargeable taxes will be discharged along with the tax debt.
Chapter 13: How do I deal with the accrued interest on the priority taxes?
Some debtors question whether the interest that accrues during bankruptcy can be paid through bankruptcy plan payments.
The answer is, “No.” The bankruptcy code does not allow the tax authorities to be paid interest on the priority taxes through the payment plan.
The debtor can, however, pay the interest directly to the IRS or the state Department of Revenue. In fact, it’s a good idea to save an estimated amount each year for that interest and then contact the taxing authorities each you year are in bankruptcy to find out how much the accrued interest is for that year.
A general rule of thumb is to set aside 5% of the outstanding priority tax amount each year. This will help the debtor avoid having a large tax bill for the accruing interest when the plan is finally over.
What about interest on a tax lien?
A tax lien is treated differently in bankruptcy than the priority taxes.
If a debtor has a tax lien placed upon their assets, then interest will need to be paid upon that debt through the Chapter 13 payment plan and the IRS publishes every year the tax rate they are entitled to for such situations.
Tax liens can be very complicated in bankruptcy, so debtors with questions about those should speak with one of our experienced attorneys for more information.
If you need to contact W M Law to speak with one of our attorneys call us at 913-422-0909 or visit us at www.kansascitybankruptcy.com. At WM Law, we are here to help!
