Chicago Bankruptcy Question: Can Chapter 13 stop an income tax levy?

Chicago Bankruptcy Question of the Day: Can Chapter 13 stop an income tax levy?  When you file for Chapter 13 bankruptcy protection, the automatic stay of bankruptcy effectively stops any and all collection actions, including those of the Internal Revenue Service and Illinois Department of Revenue.  This includes income tax levies.  In order to be truly effective, the debt owed to the IRS and IDOR must be properly treated in your Chapter 13 plan of reorganization.

Debt owed to the IRS or IDOR in the Chicago area can be broken down into three categories in Chapter 13: secured, priority and general unsecured.  Secured debts, meaning that the taxing authority was able to obtain a lien on some property that you own, must be scheduled to be paid in full with interest within the life of the plan.  If they are not, the taxing authority can successfully object to confirmation of your plan and effectively kill your case.

Priority debts to the IRS and IDOR are generally those that have been incurred within the past three taxing years.  The U.S. Bankruptcy Code treats these debts better than they do general unsecured debts, even though they do not have any collateral against them.  They are paid before general unsecured creditors and are entitled to be paid in full in the Chapter 13 plan.  If there is not enough income available to pay them full during the life of the plan, and if they consent to such treatment, they can be paid less than dollar for dollar.  The remaining balance at the end of the plan, however, is not discharged.

General unsecured income tax liabilities are usually those that are more than three years old and have not attached to any collateral.  These debts are treated similarly to credit cards and medical bills in a Chapter 13 plan.  They can be paid less than in full and will be discharged at the end of the plan.

Under a unique section of the U.S. Bankruptcy Code, income tax debts that are incurred after the filing of the Chapter 13 case can potentially be added to the Chapter 13 bankruptcy plan, assuming that there are sufficient funds being paid to the trustee to pay the debt off.  Additionally, the IRS and IDOR maintain the ability to object to any discharge of tax debt if they believe that there was fraud or tax evasion involved.

If you have income tax debt and are considering filing for Chapter 13 bankruptcy protection in Chicago, representation of a bankruptcy attorney with experience in tax issues is vital.  A good bankruptcy attorney will be able to identify what portion of the tax debt is secured, priority and unsecured and develop an effective plan of reorganization to address each class of debt while keeping the trustee payments affordable for you.  The Chicago bankruptcy attorneys at Ledford & Wu have years of experience dealing with income tax debts in Chapter 13 and are happy to offer you a free consultation to review your options.

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