Carl P. DeLuca, Attorney at Law, LLC

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Reduce, Manage and Even Discharge Taxes – Chapter 13 Bankruptcy

You Can Use Chapter 13 To Reduce and Pay Off Income Taxes

If you are having financial difficulties and tax liabilities are part of the problem, you should talk to an experienced Rhode Island bankruptcy attorney. There are benefits available to you in bankruptcy that are not available anywhere else and even if you don’t qualify for a Chapter 7 you do have some options.  You can’t discharge all taxes in bankruptcy, but you can control and possibly reduce the amount you must pay and some income taxes actually do qualify for complete discharge even in a Chapter 13. 

Bankruptcy Attorney - Warwick, RI

How Taxes Are Treated in Chapter 13 Bankruptcy

Tax liabilities are one of the  reasons that people file for bankruptcy. Some taxes can be discharged during a Chapter 13 bankruptcy, but there are several conditions to qualify for that. Many people will not be able to discharge income taxes in full, but this type of bankruptcy has a contingency for that situation. Whatever taxes aren’t discharged due to not meeting the requirements can be paid in installments you can afford via a court-approved payment plan that is the hallmark of a Chapter 13 bankruptcy.

Income Taxes

If you owe income taxes, the first thing you need to do is determine whether it’s a non-priority or a priority debt. This is something that a Rhode Island bankruptcy attorney can help you with. The reason this is so important is that any priority taxes have to be paid fully in your Chapter 13 payment plan. The taxes considered to be non-priority will be categorized with your unsecured debt, such as medical bills and credit card balances an these may be discharged if not fully paid when your payment plan is completed. 

Difference Between Non-Priority and Priority Taxes

You’re probably wondering which taxes are considered non-priority at this point.  There are a few requirements, which we list below:


  • You did not willfully evade paying the taxes or commit fraud on the taxes for the year being spoken about.
  • The taxes are associated with gross receipts or income.
  • The taxes were assessed by the proper authority 240 or more days before your bankruptcy case was filed. In some cases, the actual number here will vary.
  • The tax return was filed two years or longer before the filing of bankruptcy. If you didn’t file on time or the IRS filed for you, some courts consider those taxes to be a priority and will never move them to a non-priority level.
  • The taxes for income were due three years or longer before filing for bankruptcy. Keep in mind that this also includes the time related to extensions so the date may not be exactly what you think it is.

Do your income taxes not meet all of the requirements? That means that they will be considered priority taxes. Because they are priority debts, these taxes will need to be fully paid in your Chapter 13 bankruptcy payment plan, but in payments you can manage, which we will explain further.  

Additional Priority Taxes

Income taxes from the last few years aren’t the only forms of tax debt considered a priority. Many other taxes aren’t dischargeable and must be fully paid in a Chapter 13 plan. These include the following:


  • Erroneous refunds or credits that relate to taxes that cannot be discharged
  • Medicare, FICA, and income tax collection from a paycheck by an employer
  • Any penalties for taxes that cannot be discharged
  • Sales tax collected from a customer
  • Various excise taxes, employment taxes, and custom duties

The Advantages of Chapter 13 Bankruptcy

In many cases, residents of Rhode Island can work with the IRS through an installment agreement to pay back taxes. The problem is that the IRS will continue to add interest and penalties throughout the entire payment period. This can add up and create a situation where you pay far more than what you owed to begin with.


A better alternative is filing for Chapter 13 bankruptcy. This provides you with a chance to repay the money you owe the IRS without penalties. Unless the IRS has filed for a tax lien on equity assets, interest and penalties cannot be collected during the Chapter 13 process. Below are a few of the benefits of choosing bankruptcy:


  • Tax Debt May Be Reduced – The IRS will need to separate their claim into priority, secured, and general unsecured parts. When filing for Chapter 13, the secured and priority parts need to be paid in full over five years. However, the general unsecured debt is paid based on your discretionary income.
  • Elimination of Penalties and Interest – As we mentioned, all interest and penalties stop when you file for bankruptcy. This means you will need to pay less to eliminate the tax debts that you have. This can leave additional money in your pockets.
  • Implementation of an Automatic Stay – The bankruptcy court will put an automatic stay in place to keep the IRS from making enforced collections against you. 
  • Potential to Pay Off Other Debts – The payment plan in a Chapter 13 is used for all sorts of other debts, too. If you have problems with a mortgage, an auto payment, or credit cards, this plan can also help you catch up on those things and NO CREDITOR can try to collect from you during the period of the payment plan.

How is Descretionary Income Calculated?

Your discretionary income is calculated by substracting your necessary and allowable monthly expenses from your income. The amount remaining goes into your plan to pay your priority debts first, and then towards your nonpriority debts on a pro rata basis. It is not determined by how much you owe, how much your creditors want or how much is needed to pay all of your debts. The determination is based on how much you can reasonably afford.


Whatever is left of your nonpriority debts after your plan is completed is discharged. So when you include your taxes in a Chapter 13 Plan, the amount you are required to pay will be reduced to the amount that is determined to be priority and you will only have to pay what you can reasonably afford during the period of your plan. As a bonus, all of your remaining nonpriority, unsecured debt is discharged.


Some people will find that filing for Chapter 13 bankruptcy is the best option for their needs. However, it’s important to speak with a bankruptcy attorney to fully understand your options and their ramifications. Make sure you consider all your options and choose the solution that makes the best sense for your finances, both today and in the future.

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