Brotman Law
Unlike Chapter 7 bankruptcy, chapter 13 bankruptcy requires the taxpayer to pay all debts in full over a three-year to five-year period. With chapter 7 bankruptcy, most debts are cancelled and you must surrender some property to the bankruptcy trustee to pay creditors. However, with chapter 13, you end up paying most if not all of your debts over time. That’s why chapter 13 bankruptcy is considered the reorganization bankruptcy.
General unsecured claims and penalty claims refer to those taxes that do not receive priority tax claim status. These types of claims are not entitled to secured, administrative tax claim (Armknecht). They do not qualify for priority tax claim status because of the nature of the claims; they are, in fact, old claims.
Priority tax claims, as referenced in 11 U.S.C. 507(a)(8), include the following categories:
Secured claims are defined as those claims secured by a lien on the debtor’s property. The claim can only be secured “to the extent of the value of the property securing the claim. For example, a claim for $40,000 secured by a piece of property worth $10,000 would be a secured claim of $10,000 and either a priority tax claim or a general unsecured claim of $30,000” (Armknecht). When it is discovered that a creditor has a lien on a property that also has a superior lien “in excess of the value of the property, [then] the claim is not secured” (Armknecht). In essence, a preexisting lien determines the priorities of other creditors. The presence of a tax lien will determine whether the lien is a priority tax claim or a general unsecured claim. The amount of the lien is dependent upon the value of the property. “If the amount of the superior lien is less than the value of the property upon which the IRS filed its lien, then the IRS will have a secured claim to the extent of that the value of the property exceeds the value of the superior lien” (Armknecht). The remaining balance of the tax claim is still subject to the provisions that govern priority of claims under section 507 of the U.S. code.
When the debtor files a petition for bankruptcy relief, this action immediately affects the collection of taxes. Debtors should first familiarize themselves with preferred tax resolution methods specific to innocent spouse relief, a request for abatement of penalties, an installment agreement, or an offer in compromise (OIC). “Using administrative tax resolution methods instead of bankruptcy may help clients avoid having a ‘black mark’ on their credit history. However, a federal tax lien listed on the debtor’s credit report may damage his or her credit rating as much as a bankruptcy notation” (JournalofAccountancy.com, “Discharging Taxes in Bankruptcy,” 8/15/2013). When the standard options are not sufficient, petitioning for bankruptcy relief may be appropriate.
Chapter 13 bankruptcy is an option for individual debt adjustment under the U.S. Bankruptcy Code. Chapter 13 is a wage earner’s plan, which “enables individuals with regular income to develop a plan to repay all or part of their debts” (USCourts.gov, “Bankruptcy Basics PDF, p. 22,” 8/15/2013). Under chapter 13, the debtor proposes a repayment plan which allows for installments to be paid to creditors. When the debtor’s currently monthly income is less than the applicable state median, the plan will be for three years; however, the court reserves the right to approve a longer period. When the debtor’s current monthly income is greater than the applicable state median, the plan must be for five years. In this context, the plan cannot include payments that exceed five years. During the repayment period, “the law forbids creditors from starting or continuing collection efforts” (p. 22).
In small business owner cases, the debtor may not be required to file a separate disclosure statement, provided that the “court determines that adequate information is contained in the [reorganization] plan” (“Bankruptcy Basics, p. 30). With this in mind, small business bankruptcy cases are treated differently than regular bankruptcy cases.
Chapter 11 bankruptcy is a form of reorganization under the U.S. Bankruptcy Code. The requirements specific to an individual debtor work much the same as those outlined under chapter 7. However, with chapter 11 bankruptcy, a petition may be voluntary or involuntary. When the petition is involuntary, it is filed by creditors that meet certain requirements (“Bankruptcy Basics, p. 29”). Voluntary petitions require adherence to a prescribed format; debtors must use “Form 1 of the Official Forms prescribed by the Judicial Conference of the United States” (p. 29).
Chapter 7 bankruptcy is a form of liquidation under the U.S. Bankruptcy Code. Under Chapter 7, the trustee of the bankruptcy court “gathers and sells the debtor’s nonexempt assets and uses the proceeds of such assets to pay holders of claims (creditors) in accordance with the provisions of the Bankruptcy Code” (USCourts.gov, “Bankruptcy Basics PDF, p. 14), 8/15/2013). Within this context, the debtor’s property can be subject to lien and mortgages, pledging the property to other creditors. The Bankruptcy Code allows the debtor to keep certain property that falls under “exempt.” Other non-exempt remaining assets will be liquidated. In essence, filing under Chapter 7 may result in the loss of property.
The Collection Statute Expiration Date (CSED) falls under Section 19[1] of the Internal Revenue Manual (IRM). The CSED refers to the idea that every tax assessment has a statute of limitations. The rules and procedures for the CSED are governed by statute, namely section 6502(a) of the Restructuring and Reform Act of 1998 (RRA 98).