Can the IRS Charge Interest & Penalties While You're in Bankruptcy?

By Beverly Bird

Bankruptcy rules and regulations – particularly regarding taxes – can be highly dependent on the chapter you file. Both Chapter 7 and Chapter 13 stop collection efforts by the Internal Revenue Service while you're in bankruptcy. Beyond this, however, each chapter treats tax debts differently.

Chapter 7

In a Chapter 7 bankruptcy, the trustee takes control of your non-exempt assets and sells them to pay your creditors. Exemptions allow you to protect some of your property. If you have no non-exempt assets so there's nothing to liquidate, some tax debts can be eliminated – those resulting from returns you submitted at least two years before you filed if the returns were due at least three years before. If you have some non-exempt assets, the IRS receives payment before other creditors. If your tax debt isn't discharged, it will still be due after your bankruptcy is over; the IRS can begin trying to collect from you again at that time. Interest and penalties continue to accumulate while you're in bankruptcy.

Chapter 13

Chapter 13 is a court-approved plan to pay off your creditors with your disposable income over a period of three to five years. If you owe the IRS, your tax debt is included in the debts paid off through your plan. If you don't pay the tax debt entirely, the remaining balance is typically discharged. Unlike with a Chapter 7 proceeding, penalties and interest stop piling on when you file for Chapter 13 protection.

Get a free, confidential bankruptcy evaluation. Learn More
Get a free, confidential bankruptcy evaluation. Learn More
Can the IRS Levy Wages if You Are in Chapter 13?

References

Related articles

Do I Owe a Penalty if I Don't File a Pennsylvania Corporation Tax Return?

Pennsylvania levies a corporate income tax on certain firms doing business in the state. At the time of publication, the state’s corporate tax rate is 9.99 percent of federal taxable income; non-profits, membership associations, business trusts and homeowners’ associations are exempt. By Pennsylvania law, any entity classified by the IRS as a corporation is subject to state income taxes.

Do Tax Liens Survive in Chapter 7?

If you fail to pay taxes, the government can slap a tax lien on your property. The lien gives the Internal Revenue Service or local taxing authority a claim on the amount you receive if and when the property is sold. Ordinarily, back taxes are a priority debt in bankruptcy, meaning the court will not discharge them. However, bankruptcy law allows some exceptions.

How Much of Your Tax Refund Do You Have to Give the Bankruptcy Trustee in Illinois?

Filing for bankruptcy in Illinois, as elsewhere, means petitioning a federal bankruptcy court for debt relief and protection. You can either surrender assets to repay creditors, through a Chapter 7 proceeding, or set up a repayment plan, through a Chapter 13 bankruptcy. If you have a refund coming from the IRS, you'll need to inform the court-appointed trustee handling your case. In some instances, you must surrender the refund; in others, you may be able to keep all or part of it.

Related articles

Chapter 13 Laws Regarding Income Taxes

Bankruptcy rules concerning the discharge of federal income tax debt are different depending on whether you file under ...

Tax Penalties and Interest in a Bankruptcy

If you've ever found yourself in a position where your income tax debt was more than your available resources to pay ...

Can Back Taxes & Child Support Be Reduced in Bankruptcy?

Bankruptcy can help you clear up many past debts, such as credit cards, personal loans and other financial obligations ...

Does Bankruptcy Supercede a 1099C?

Most individual debtors file for Chapter 7 or Chapter 13 when they go bankrupt. The processes are very dissimilar, but ...

Browse by category
Ready to Begin? GET STARTED