Chapter 13 question about priority vs. unsecured

[southernbelle]

My question stems from the fact that I checked PACER today (current status 20 days since my 341 and no objections yet ) and when I checked the claims filed I found that the IRS filed a claim stating that the amount I owe them is about 50% unsecured and 50% priority (no other claims filed yet).

I don't know if filing a non-dischargeable chapter 13 is different from a regular 13 except from the fact that there is no discharge at the end, but would these numbers mean that I will have to pay the priority amount in full at 100% and the unsecured amount from any remaining disposable income I have or do I have to pay priority and unsecured amounts combined 100% in full without separating them out?

I am seriously hoping that I only have to pay the priority amounts because it would make it a lot less stressful to fund without essentially working 2 full time jobs because I've lost too much sleep about this issue as it is.

Thanks for any input, comments or suggestion anyone here can give.

[rrockinggramma]

I would think that that is what it would mean, which means that the non priority would be paid at a lower rate. But since you aren't being discharged at the end, the remaining amount won't go away, right? Hmm now I am confused.

[southernbelle]

You and me both. I was wondering how that works and know that my situation isn't the norm, but you are right. If they break it out and show a portion unsecured and a portion priority and I can't get a discharge, what happens to the amount that isn't repaid? Or does that mean that it all has to be repaid 100% and if that's the case why couldn't I convert to a chapter 13 now?

[biotechsolution]

you must be filing an asset case? because otherwise the IRS won't file claims in chapter 7 no-asset cases. what happens normally is you have to file an adversary proceeding to find out which debts are dischargeable and which are not if there are questions in a chapter 7. If there claim has unsecured- priority, secured and non-priority unsecured. the last one should be discharged in your 7. If none of them are discharged in your 7 then all of them would have to be repaid you your chapter 13.

Is there a reason you aren't doing an Offer-in-Compromise instead???
You have just come out of a bankruptcy, your income shouldn't be that high.
You might have better luck getting the amounts reduced by raising issues of collectability.

[southernbelle]

Yes, it is an asset case. Not much value in the items the trustee will eventually have turned over to her though. The amounts the IRS has listed on their claim is shown only as UNSECURED or PRIORITY (nothing is listed under Secured) because there was no tax lien or anything. The unsecured tax doesn't say that it is priority. I wasn't aware of the fact that the unsecured taxes would be discharged through the chapter 7 if the claim is filed that way. Based on how they are listed, would you say that they could be?

My atty. would definately charge me more for an adversary proceeding, but since I owe other taxes and not just the IRS, do you think it would be worth it in this case?

I've considered an OIC with the IRS and printed out the necessary paperwork, but wanted to try the non-dischargeable 13 route since they will most definitely file a tax lien until the taxes are settled due to the amount owed which will cripple me credit wise and I would probably still be left to deal with the other taxes afterward also.

However, I've talked to at least 3 different attys that all told me that some of the local taxing authorities just don't pursue collections after a bankruptcy is filed. Knowing my luck, I would be the one they hound the most and there will probably be so much interest and penalties tacked on to the existing amount, I'll be in a worst situation than if I filed a chapter 13, but knowing there is a possibility some of the taxes could be discharged, gives me hope since the amount I owe could be drastically lower than originally thought.

[southernbelle]

Will the fact that these are Trust Fund Taxes make a difference?

[krielly]

The "priority" portion of the IRS's claim is for principal. - this will be paid at 100%
The "unsecured" portion is for penalties & interest - this will be paid at whatever percentage your plan calls for (if you are in a 13).

I'm confused as to why you mention a non-dischargeable 13? But then you mention filing a 7?? Sorry, just trying to understand how you would be able to file a 7, and receive a discharge, if you did not qualify for a dischareable 13....?????????

K

[southernbelle]

I am currently in a chapter 7 and awaiting discharge. Since I had a failed business, the chapter 7 is for everything except the taxes because they are non-dischargeable and I don't have enough disposable income (or at least I didn't have enough when I filed) to fund everything in a chapter 13. Since my 341, I was able to find a second job because I still have the taxes to pay.

I am considering filing a non-dischargeable chapter 13 because I plan to file shortly after I receive my chapter 7 discharge which means that I will not qualify for a discharge since I didn't wait the required amount of time before filing another BK but prefer the protection BK provides. I am also considering an Offer in Compromise with the IRS, but didn't know how the taxes that are "unsecured" would be handled since there is no "discharge" when I am done with the plan and don't really want to have a tax lien filed against me before I am able to pay them back.

I seems like even though the taxes are split between unsecured and priority, I was wondering if I had to repay them all back at 100% because there wouldn't be a discharge at the end.

I know this is nuts, but this is the story of my life.

[CindyLou]

SB,
It is my understanding that the unsecured portion will go away in the 7. You will be left with the priority portion only for the 13. Also, I think the IRS collections have a 10 year statute. Some people will use the BK to get close to the 10 year point....how old are the taxes?

[Granny]

Filing BK suspends the statue of limitations clock from ticking and it restarts again after the BK is discharged or closed. So if you file a Ch 13 and are in BK for 3 years, the IRS actually has 13 years to collect.

[CindyLou]

It does appear that I may not know what I'm talking about...SORRY! Ok, this is what I found. I applies to New Jersey, but the federal stuff is going to be the same as Louisiana:

Taxes & Bankruptcy

Income Taxes (New Jersey and Federal). Income tax debts can be discharged in bankruptcy, but only if the tax is more than 3 years old and satisfies several other legal requirements. The tax debt can be discharged (wiped out) only if all of the following requirements are met with respect to each tax year.

Three Year Rule. More than 3 years must elapse between the bankruptcy filing date and the date the income tax return was last due, including all extensions.

Example : 1997 federal income taxes can not be discharged in bankruptcy unless the bankruptcy petition is filed on or after 4/16/2001.

Filing Extensions. The 3 year time period does not expire until the due date for filing the tax return. For federal income taxes, if no extension is requested, the 3 year time period will elapse on April 15 of the 3rd year following the tax year in question. If an automatic extension is requested, the 3 year time period will not expire until the last date of the extension period (August 15).

Example : If the taxpayer requests a four month automatic extension to file his 1997 federal income tax return, the taxes can not be discharged in bankruptcy unless the bankruptcy is filed on or after August 16, 2001.

Due Date of Tax Return Controls - Not The Actual Date the Tax Return is Filed. The last due date for filing the tax return is the proper date for determining if the 3 year age rule has been satisfied. The date the taxpayer actually files the return is irrelevant.

Example : On April 15, 1998, Taxpayer requests an automatic extension to file his 1997 federal income tax return, which makes the return due on August 15, 1998. It is irrelevant to the 3 year age rule whether Taxpayer actually files the return early (prior to August 15, 1998) or late (after August 15, 1998). The taxes will be discharged only if the bankruptcy petition is filed on or after August 16, 2001.

Two Year Filing Rule. To discharge a tax debt in a Chapter 7 case, the taxpayer must file the return for the tax year in question more than 2 years before he files for bankruptcy. Although the 3 year rule considers the age of the tax, the 2 year rule only deals with the filing of any required tax return.

IRS Filed Returns May Not Qualify. The Internal Revenue Code authorizes the IRS to file a substitute return for a taxpayer if he fails to prepare and file the return. If IRS prepares a return for the taxpayer, the taxpayer can consent to the return by signing it, or the IRS can file the return without the taxpayer?s consent. If the taxpayer does not sign or otherwise agree to an IRS filed return, the IRS return does not count as a filed tax return for purposes of the 2 year filing rule. However, if the taxpayer signs the return, the IRS return will count as a filed return for purposes of the 2 year filing rule.

The Filing Date for Purposes of 2 Year Rule. Federal tax returns filed before the due date are not considered filed until the due date. Returns filed after the due date are considered filed on the date the IRS actually receives the return. If the taxpayer files the return before the due date, the 2 year time period starts to run on the tax return due date, not the actual filing date. If the taxpayer files the return late (after the last due date), the 2 year time period starts to run on the date that IRS actually receives the return.

240 Day Assessment Rule. A taxpayer can not discharge a tax in bankruptcy unless the taxing authority assesses the tax more than 240 days before the taxpayer files for bankruptcy. If the taxpayer makes any offer in compromise, the 240 day time period is extended by the number of days the offer in compromise is pending, plus an additional 30 days. The 240 day rule normally comes into play only if the taxing authority audits a prior return and assesses additional tax as a result of the audit.

Example : On April 15, 1999, Taxpayer files his 1998 federal income tax return. On November 1, 2001, IRS commences an audit of the 1998 return. On April 14, 2002, as a result of the audit, IRS assesses $100,000 of additional tax. Taxpayer has satisfied both the 3 year age and 2 year filing rules, but the 240 day assessment rule will not be satisfied until after December 11, 2002; 240 days after IRS assessed the additional tax. To discharge the $100,000 of additional tax, Taxpayer can not file bankruptcy until on or after December 11, 2001.

Tax Fraud and Willful Evasion. A tax debt is not dischargeable in a Chapter 7 bankruptcy case if the taxpayer files a fraudulent return. A return is fraudulent if the taxpayer intentionally fails to report income or makes misrepresentations on the return. Likewise, a taxpayer can not discharge a tax in a Chapter 7 bankruptcy case if he willfully attempts to defeat or evade payment of the tax. The following conduct could qualify as tax evasion: (1) the taxpayer has the ability to pay the tax but uses the funds for other purposes; or (2) the taxpayer evidences a pattern of failing to file returns, failing to pay taxes, or attempting to hide income and assets. The tax fraud issue can be raised after the bankruptcy case is filed and closed.

Employment Taxes. There are two parts to every employment tax: the employee portion and the employer portion.

Employee Portion (Trust Fund Taxes). The employee portion is the portion of the tax which the employer is required to withhold from an employee?s pay check and remit to IRS. The employee portion includes the federal withholding tax, 6.2 percent social security tax and 1.45 percent medicare tax. The employee portion is typically referred to as a "trust fund" tax because the employer is required to hold the money in trust, on behalf of the employee, for payment to IRS.

The rule relating to any "trust fund" tax is very simple: a trust fund tax is never dischargeable in bankruptcy, regardless of the age of the tax. Even trust fund taxes which are over 10 years old can not be discharged in bankruptcy. However, see the discussion below ?Statute of Limitations" for a discussion of the 10 year time limit on the collection of federal tax debts.

Employer Portion. The employer portion is the tax which the employer owes directly to the government. The employer portion includes the employer?s obligation to pay an additional 6.2 percent of social security tax and an additional 1.45 percent of medicare tax.

A taxpayer can discharge the employer portion if he can satisfy the 3 year age and 2 year filing rules, and taxpayer?s failure to pay was not the result of tax evasion. In other words, the employer portion of the tax is dischargeable if:

(a) more than 3 years pass between the bankruptcy filing date and the date the 941 tax return is last due, including all extensions;

(b) less than 2 years elapse between the date the 941 tax return was filed and the date the bankruptcy is filed; and

(c) the taxpayer did not willfully evade payment of the tax.

There is no similar 240 day assessment rule for employment taxes. If the 3 year, 2 year and tax evasion rules are all satisfied, it is irrelevant when IRS assesses the tax.

Sales Taxes. A sales tax is a tax collected from a customer by a seller of goods or services.

Trust Fund Status of Sales Taxes. In New Jersey, sales taxes are classified as "trust fund" taxes and are not dischargeable in bankruptcy, regardless of the age of the tax. The taxes are "trust fund" taxes because the employer is obligated to collect the tax from the customer and hold the funds in trust for payment to the New Jersey Division of Taxation.

Penalties and Interest.

Interest. For federal tax debts, the interest follows the tax. If the tax is dischargeable in bankruptcy, the interest is dischargeable. If the tax is not dischargeable, the interest is likewise not dischargeable.

Penalties.

Tax Dischargeable - Penalty Dischargeable. If a federal tax is dischargeable in bankruptcy, the penalty is also dischargeable.

Non-Dischargeable Taxes. The reverse of the previous rule is not necessarily true. In some cases, the penalties related to non-dischargeable taxes are likewise not dischargeable. However, in other cases, the penalty is dischargeable even if the underlying tax is not dischargeable.

(a) Non-Dischargeable Taxes Less than 3 Years Old. If the tax is not dischargeable because it relates to a tax year less than 3 years old, any penalty relating to the unpaid tax will also be non-dischargeable.

(b) Non-Dischargeable Taxes More than 3 Years Old. Tax penalties are dischargeable in bankruptcy if the events giving rise to the penalty occurred more than 3 years before the taxpayer files for bankruptcy, even if the related tax is not dischargeable.

Offers in Compromise. An offer in compromise is an alternative method of settling a tax debt by offering to pay IRS less than the full amount due. The submission of an offer in compromise will suspend the running of (stop the clock on) the 240 assessment time period. If the taxpayer makes an offer in compromise within 240 days of filing for bankruptcy, the 240 day time period will be suspended for the time during which the offer in compromise is pending, plus an additional 30 days.

Tax Liens. Tax debts can become "secured" debts if the taxing authority takes the steps necessary to obtain a lien against the taxpayer?s property before he files for bankruptcy. If the taxing authority obtains a pre-bankruptcy tax lien, the attachment of the lien can drastically impair a taxpayer?s ability to avoid payment of the tax through a bankruptcy filing.

Federal Tax Liens - Attachment of Lien. To obtain a federal tax lien valid in bankruptcy, IRS must file a "Notice of Federal Tax Lien" in the real property records of the county clerk before the taxpayer files for bankruptcy.

Real Property (Land & Improvements). To assert a valid tax lien against real property (land and improvements to land), IRS must file the tax lien notice in the county where the land is located.

Personal Property. To assert a valid tax lien against personal property (everything other than land and improvements to land), IRS must file the tax lien notice in the county where the taxpayer resides on the date the tax lien notice is filed. It is irrelevant whether the property is located in a county different from the taxpayer?s residence or whether the taxpayer moves to a different county after IRS files the tax lien notice. If the tax lien is properly secured, the taxpayer can not defeat the lien by moving his residence or property to a different county.

Pre-Bankruptcy Liens Survive Bankruptcy. A tax lien will continue to exist after the entry of a bankruptcy discharge with respect to all property the taxpayer owns on the date he files for bankruptcy. Although the tax lien survives bankruptcy, the taxpayer?s personal liability to pay the tax will be released if all other requirements for a bankruptcy discharge are satisfied. This means that after the entry of a discharge order, the taxing authority can never collect the tax as a personal obligation of the taxpayer, but can pursue collection by seizing and selling any property the taxpayer owned on the date he filed for bankruptcy.

Tax Liens Do Not Attach to Post Petition Property. Tax liens do not attach to property acquired by a taxpayer after he files for bankruptcy, unless he acquires the property with funds or property he owned before filing for bankruptcy. In other words, if the tax debt is dischargeable, and the taxpayer acquires any property after he files bankruptcy, with funds earned after the bankruptcy filing, the taxing authority will not be able to seize and sell the post petition property to pay the tax. For this reason, a tax lien will not affect a taxpayer with few assets on the day he files for bankruptcy.

Statute of Limitations.

Federal Taxes. IRS? ability to collect any federal tax expires 10 years after it assesses the tax, unless it commences a lawsuit to collect the tax, obtains a favorable court judgment and periodically renews the judgment. The 10 year statute of limitations also applies to tax liens. A federal tax lien will expire 10 years after the tax is assessed, unless IRS begins a lawsuit to collect the tax, obtains a favorable court judgment, and periodically renews the judgment. The 10 year time period begins to run on the date IRS assesses the tax, not on the date it files a tax lien. A bankruptcy filing is unnecessary if the taxpayer?s primary goal is to avoid payment of a federal tax assessed more than 10 years ago.

Example Taxpayer owes unpaid employment taxes (both the employer and employee portions) for the 1991 tax year. The unpaid tax was assessed on 1/15/1992. IRS files a tax lien five years later on 1/15/1996. Taxpayer can never discharge the employee portion of the tax in bankruptcy. However, the tax will become uncollectible, and the tax lien will expire, unless IRS files suit to collect the tax on or before 1/15/2002, 10 years after the tax was assessed.



Chapter 13 Cases. The rules relating to dischargeability of tax debts are more liberal in Chapter 13 cases than Chapter 7 cases. Tax claims (as well as all other debts) are classified as secured, priority or general unsecured debts. The classification of a debt as secured, priority or general unsecured will usually determine whether the taxpayer must pay all or none of the tax, and whether interest and/or penalty must be paid.

Priority Taxes. A Chapter 13 repayment plan must propose full payment of all "priority" debts. The bankruptcy court will not approve a plan that does not meet these guidelines. A "priority" tax is any income, employment, sales or property tax which can not be discharged in a Chapter 7 case, except for two very important differences:

Two Tear Rule Not Applicable. The two year filing rule does not apply in Chapter 13 cases. For income tax debts, the tax will be classified as "general unsecured" rather than "priority," and can be discharged without payment, even if the taxpayer never files a tax return, so long as the 3 year age and 240 day assessment rules are satisfied. For employment taxes, the employer portion will not be classified as "priority," and can be discharged without payment, if the tax satisfies the 3 year age rule. A taxpayer?s failure to file a 941 tax return will not prevent discharge of the tax.

Example Taxpayer never filed any federal income tax returns for the 1990 through 2000 tax years. Taxpayer can never discharge any of these taxes in a Chapter 7 case. It does not matter when the case is filed. A tax can never be discharged in a Chapter 7 case if Taxpayer never files a tax return.

If Taxpayer files a Chapter 13 case on or after April 16, 2001, the 1990 through 1997 taxes will be classified as "general unsecured" and can be discharged without payment if Taxpayer successfully completes a Chapter 13 plan. The 1998 through 2000 taxes will be classified as "priority" taxes. The Chapter 13 plan must provide for full payment of these taxes.

Tax Evasion Limitations Not Applicable. The rules preventing discharge of taxes resulting from willful evasion or a fraudulent return do not apply in Chapter 13 cases. In Chapter 13, the taxpayer can discharge the tax without payment, even if he is guilty of tax evasion or filed a fraudulent return. However, the government can still criminally prosecute the taxpayer for tax evasion, even after the taxes have been in Chapter 13, so long as the 6 year statute of limitation for tax fraud prosecutions has not expired.

Interest and Penalty on Priority Tax Claims. A priority tax claim includes all accrued interest though the bankruptcy filing date, but excludes all accrued penalties. The Chapter 13 plan will not pay post filing interest on any priority claim, including priority tax claims.

and here's the link for reference:

http://www.cerbonelaw.com/Taxes.jsp

[southernbelle]

Thank you for the information Cindy. I appreciate the research. After reading your post, I realize that the unsecured portion of the tax is not dischargeable in my chapter 7 because I filed the returns too late, but I think it might be dischargeable in a chapter 13 and I am going to find out if my atty. can answer that one for sure, but I'll try to send the firm in your link an email to see if they can help me also.

The only thing that makes me nervous is the non-dischargeable part of the 13 and the last time I spoke with my atty. about it, he had a "we can try it" attitude which is not what I wanted to hear I guess because if it doesn't work I'll be back at square one with these taxes, but in his defense I think a non-dischargeable chapter 13 is unchartered territory in my District.

If it turns out that it needs to be paid 100% because there is no discharge at the completion of the plan, I'm probably going to submit an OIC and taking my chances with the tax lien. Thank you again.