Can the IRS Levy Wages if You Are in Chapter 13?

By Tom Streissguth

A chapter 13 bankruptcy allows you to stop collection actions by creditors, including wage garnishments. You must draw up a plan for partial repayment of unsecured debts, such as credit card balances and personal loans. After you've completed payment according to the plan, the bankruptcy court discharges any remaining unsecured debts allowed by law. You get a clean financial slate with the exception of some nondischargeable debts, like federal taxes.

IRS Collections

If you are unable to pay overdue taxes, the IRS will usually agree to an installment plan, which allows you to pay a certain amount monthly until the bill is settled. If you don't follow through, or can't satisfy a past-due balance, the IRS has the authority to levy bank accounts, place liens on your property or garnish your wages -- all without a court judgment or order. However, wage garnishment is subject to state and federal regulations, which limit the percentage of your income that can be seized.

Initial Filing and Schedules

When you file a bankruptcy petition, an automatic stay goes into effect, which stops all collection actions, including lawsuits filed by your creditors and garnishment of your wages by the IRS. The court notifies the tax authorities that you filed for chapter 13 bankruptcy. However, you must list the tax debt on a bankruptcy schedule to file with the court. You must also list your current income from all sources, including wages from your employer. This income determines the amount of your monthly payments in your chapter 13 repayment plan.

Get a free, confidential bankruptcy evaluation. Learn More

Nondischargeable Taxes

Although you stop garnishment by filing a bankruptcy petition, you still owe the taxes and must repay the IRS through your repayment plan. Normally, the IRS will not agree to any reduction in the amount you owe, nor will the court discharge back taxes. This is true whether or not the tax debt is secured by a lien on your property. If a balance due remains after the bankruptcy is discharged, or if the court dismisses your case prior to discharge, you will be subject to IRS garnishment once again, until the full amount of back taxes -- including interest and penalties -- is paid.

Limits on Tax Collections

Some older tax debts are subject to discharge in bankruptcy. To discharge your overdue taxes, the tax return associated with the debt must have been due at least three years prior to the bankruptcy filing. Also, the IRS will not allow the discharge of taxes, interest or penalties due in association with a fraudulent return, or if you were found guilty of tax evasion. The agency may also claim the right to any tax refunds that come due during the bankruptcy.

Get a free, confidential bankruptcy evaluation. Learn More
Can the IRS Charge Interest & Penalties While You're in Bankruptcy?



Related articles

How to File for Bankruptcy for a Voluntary Repossession

Other than a house, your vehicle may be the most valuable asset you own, but repossession may seem like your only option when you can’t make your car payments. With repossession, your bank can take your car, sell it and apply the proceeds toward your loan balance. However, bankruptcy may allow you to restructure your loan so you don’t face repossession, and bankruptcy can erase your remaining debt if your vehicle has already been repossessed.

Can Creditors Sell Debt to a Collection Agency After Bankruptcy Has Been Filed?

When you file for bankruptcy, you ask a federal court to protect you from collection actions and lawsuits by your creditors. If the court accepts your petition, it will grant an automatic stay, which stops all collection action while the bankruptcy is in progress. Creditors must file claims with the court; if the court accepts the claim, then a court-appointed trustee will pay a portion of the debts you owe out of your assets. During this process, your creditors keep their right to assign your debt to a collection agency.

Will I Get Discharged From Bankruptcy If I Owe Taxes?

Many people filing bankruptcy are also behind on their taxes. Most taxes are not dischargeable in bankruptcy, but in some cases, a portion of the taxes owed may be discharged if certain conditions are met. If you owe taxes, this won't prevent your other debts from being discharged.


Related articles

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 ...

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 ...

Browse by category
Ready to Begin? GET STARTED