If you owe recent income taxes, or multiple years of taxes, Chapter 13 can provide huge advantages over Chapter 7, and over other options.


This blog post will illustrate this with an example, which will be more fully explained in my next blog.

The Example

Consider a husband and wife with the following scenario:

  • Husband lost his job in 2008, so he started a business, which, after a few promising years in which it generated some income, failed in late 2012.
  • The wife was consistently employed throughout this time, with pay raises only enough to keep up with inflation.
  • They did not have the money to pay the quarterly estimated taxes while husband’s business was in operation, and also could not pay the amount due when they filed their joint tax returns for 2008, 2009, 2010, 2011 and 2012. To simplify the facts, for each of those five years they owe the IRS $4,000 in taxes, $750 in penalties, and $250 in interest. So their total IRS debt for those years is $25,000—including $20,000 in the tax itself, $3,750 in penalties, and $1,250 in interest.
  • Husband found a reliable job six months ago, although earning 20% less than he did at the one he lost before he started his business.  
  • They filed every one of their joint tax returns in mid-April when they were due, and have been making modest payments on their tax balance when they have been able to.
  • They have no debts with collateral—no mortgage, no vehicle loans.
  • They owe $35,000 in medical bills and credit cards.
  • They can currently afford to pay about $500 a month to all of their creditors, which is not nearly enough to pay their regular creditors, and that’s before paying a dime to the IRS.
  • They are in big financial trouble.

Without Any Kind of Bankruptcy

  • If they tried to enter into an installment payment plan with the IRS, they would be required to pay the entire tax obligation, with interest and penalties continuing to accrue until all was paid in full.
  • The IRS monthly payment amount would be imposed likely without regard to the other debts they owe.
  • If the couple failed to make their payments, the IRS would try to collect through garnishments and tax liens.
  • Depending how long paying all these taxes would take, the couple could easily end up paying $30,000 to $35,000 with the additional interest and penalties.
  • This would be in addition to their $35,000 medical and credit card debts, which could easily increase to $45,000 or more when debts went to collections or lawsuits.
  • So the couple would eventually end up being forced to pay at least $75,000 to their creditors.

Under Chapter 13

  • The 2008 and 2009 taxes, interest and penalties would very likely be paid nothing and discharged at the end of the case. Same with the penalties for 2010, 2011, and 2012. That covers $11,500 of the $25,000 present tax debt.
  • The remaining $13,500 of taxes and interest for 2010, 2011, and 2012 would have to be paid as a “priority” debt, although without any additional interest or penalties once the Chapter 13 case is filed.
  • Assuming that their income qualified them for a three-year Chapter 13 plan, this couple would likely be allowed to pay about $500 per month for 36 months, or about $18,000, even though they owe many times that to all their creditors.
  • This would be enough to pay the $13,500 “priority” portion of the taxes and interest, plus the “administrative expenses” (the Chapter 13 trustee fees and your attorney fees).
  • Then after three years of payments, they’d be completely done. The “priority” portion of the IRS debt would have been paid in full, but the older IRS debt and all the penalties would be discharged (written off), likely without being paid anything. So would the credit card and medical debts.

After the three years, under Chapter 13 the couple would have paid a total of around $18,000, instead of eventually paying at least $75,000 without the Chapter 13 case. They’d be done—debt-free—instead of just barely starting to pay their mountain of debt. And they would have not spent the last three years worrying about IRS garnishments and tax liens, lawsuits and harassing phone calls, and the constant lack of money for necessary living expenses.

The next blog post will show how all this works.


Bankruptcy can often help you deal effectively with business taxes. Here are three myths, and the truth exploding them.

Myth #1: Bankruptcy can’t write off taxes.

Truth: Some taxes can’t be written off. But many others CAN be through either a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts.” This depends on a number of rather complicated factors, including the following:

  • whether you filed a tax return for the tax year at issue
  • if so, when that tax return was filed
  • how long it’s been since that tax was first due
  • whether and when you asked to get a compromise of that tax
  • whether you tried to evade that tax in any way

So any particular tax you may owe has to be analyzed carefully with your attorney. But don’t start with the assumption that your taxes can’t be written off, or dealt with in some other favorable way.

Myth #2: Business taxes particularly can’t be written off.

Truth: Income that you pay yourself from your business is generally treated as your personal income. And particularly if your business is a sole proprietorship or a partnership, then your share of the business’ income (after expenses) flow through to you as personal income.

If your business is a corporation, then your salary or any other form of income you receive from the business is generally treated as personal income. The income tax on these various sources of “business” income can be written off just like any personal income tax from a conventional employer, depending on the same factors listed above.

If any of your taxes can’t be discharged in either a Chapter 7 or 13 case, Chapter 13 would nevertheless give you 3-to-5 years to pay those taxes, while under the protection of the IRS (and any applicable state tax authorities). Also, usually all interest and penalties which would otherwise have accumulated during this time would be waived, as long as you finished the case successfully.

Furthermore you can often pay less–and maybe even nothing—to your other creditors, allowing instead for your money to go to pay off the taxes. So at the completion of your case you would owe nothing in either taxes or any other debts.

Myth #3: Bankruptcy particularly does not help with unpaid employee withholding taxes that as an employer you were supposed to turn over to the IRS or state.

Truth: Although bankruptcy never discharges this category of taxes, in a Chapter 13 case these withholding taxes are basically treated just like other taxes that can’t be discharged, as discussed immediately above.

So you would have years to pay off those withholding taxes, all while being protected from the tax authorities, and usually with the interest and penalties not accruing.

Finally, usually you’d be allowed to pay these taxes while paying less or nothing to many of your other creditors. These are huge advantages.

Here’s how bankruptcy actually works, and works well, even when a significant debt or two can’t be written off.

The last blog gave six reasons why it’s worth looking into bankruptcy even if you know that you can’t discharge (write off) one or more of your most important debts. Today here are concrete examples how the first three of those could work for you.

The first two reasons we’ll cover together. First, sometime debts which you might think can’t be discharged actually can be, and second, some debts that can’t be discharged now may be able to be in the near future.

Let’s say you currently owe $10,000 in federal income tax for the 2008 tax year. You filed that tax return on October 15, 2009 after getting an extension. You’ve been making monthly payments to the IRS on a payment plan, but because of that you did not make adequate tax withholdings or quarterly estimated payments for 2011. You know that once you file your 2011 tax returns (by October 15, 2012, because you got an extension) you’re going to be in trouble because you will owe a lot for that year as well. You know the IRS will cancel the payment plan for 2008 because of your failure to keep current on your ongoing tax obligations. You’re pedaling as fast as you can, but October 15 is less than two months away and you don’t know what to do. You are quite certain that the $10,000 tax debt cannot be discharged in bankruptcy.

You’d be right about that… but only for the moment. Because under these facts that 2008 tax debt could very likely be discharged through either a Chapter 7 or 13 bankruptcy case filed AFTER October 15, 2012. (Whether you’d file a Chapter 7 or 13 would depend on other factors, including how big your 2011 and anticipated 2012 tax debts will be.) Instead of being in a seemingly impossible situation, you would avoid paying all or most of that $10,000—plus lots of additional interest and penalties that you would have been required to pay. Instead you would be more than $10,000 ahead on paying off the 2011 and 2012 taxes!

Now here’s an example to go with the third reason to consider bankruptcy: even if you can’t discharge a debt, bankruptcy can permanently solve an aggressive collection problem.  

Change the facts above to make that $10,000 debt one owed for the 2009 tax year instead of 2008. Since that tax return was also filed with an extension to October 15, 2010, that $10,000 would not be dischargeable until after October 15, 2013. But in this example you’ve already defaulted on your monthly payment agreement. So you are appropriately expecting the IRS to file a tax lien on all of your personal property and on your home, and to start levying on (garnishing) your financial accounts, and on your paycheck if you’re employed or on your customers/clients if you’re self-employed.

With all that the IRS can do to you, you can’t wait until October of next year to discharge that $10,000. But if you filed a Chapter 13 case now the IRS would not be able to take any of the above aggressive collection actions against you. You would have to pay the $10,000 (and any taxes owed for 2010 and 2011) but you would have as long as 5 years to do so. And most importantly, throughout that time you’d be protected from any future IRS collection action on any of those taxes, as long as you complied with the Chapter 13 rules.

As for the 2012 tax year, you would likely be given the opportunity to pay extra withholdings or estimated payments during the rest of this year, which you would be able to afford because of temporarily paying that much less  into your Chapter 13 plan.

So instead of being hopelessly behind and deathly scared about everything the IRS is about to do to you, within a few days you could be on a financially sensible path to being caught up with the IRS. And then within three to five years you’d be tax debt free, AND debt free.

Even without mentioning the word “bankruptcy,” the most important court decision in years may still have a huge effect on future bankruptcies. How? Possibly by greatly reducing the need to file bankruptcies resulting from medical debts.  

First, a short summary.

Last week’s Supreme Court decision upheld the “individual mandate,” the most contentious part of the Affordable Care Act. That’s the obligation for certain people who don’t get health insurance to pay a penalty for not doing so. The Court held that the mandate is not constitutional under the Commerce Clause because NOT buying insurance is NOT engaging in commerce. So not buying insurance is not behavior that Congress has the power to regulate on that basis.

However, the Court still determined that the mandate is constitutional, under a different part of the Constitution, Congress’ taxing power. Even though Congress did not call the penalty a tax, it functions as a tax because, among other reasons, payment and collection of the penalty are done only through the IRS.

The Court also upheld the “Medicaid expansion” part of the Act. But while doing so the Court significantly limited a penalty for any states which decide not to participate in that expansion.

Second, if you want to read all or part of the full opinion, it’s here on the Supreme Court’s website. And for a good all-around news summary of the decision, here is an article from the Washington Post on the day it was released. For a more thorough summary, see this blog in “plain English” from the highly respected SCOTUSblog.

Third, to make it even easier for you, the rest of this blog consists of key quotations from the Court’s opinion. So you get the actual language of the court without wading through what are actually four different opinions totaling 193 pages. Thes following excerpts come only from the “opinion of the Court,” the parts which got the necessary five-out-of-nine votes to carry the day, totaling only about 36 pages out of the 193. Also to keep it manageable, these excerpts focus only on the “individual mandate” issue, not the Medicaid issue or any of the other procedural ones. (If you want to find any of the excerpts within the full opinion, the page number from Chief Justice Roberts’ opinion is in parentheses at the end of each one.)


Introductory excerpts:

“In our federal system, the National Government pos­sesses only limited powers; the States and the people retain the remainder. Nearly two centuries ago, Chief Justice Marshall observed that ‘the question respecting the extent of the powers actually granted’ to the Federal Government ’is perpetually arising, and will probably continue to arise, as long as our system shall exist.’ McCulloch v. Maryland, 4 Wheat. 316, 405 (1819).” (p. 2)

“The Federal Government has expanded dramatically over the past two centuries, but it still must show that a consti­tutional grant of power authorizes each of its actions.” (p. 3)

“Our permissive reading of these powers is explained in part by a general reticence to invalidate the acts of the Nation’s elected leaders. ‘Proper respect for a co-ordinate branch of the government’ requires that we strike down an Act of Congress only if ‘the lack of constitutional authority to pass [the] act in question is clearly demon­strated.’ United States v. Harris, 106 U. S. 629, 635 (1883). Members of this Court are vested with the authority to interpret the law; we possess neither the expertise nor the prerogative to make policy judgments. Those decisions are entrusted to our Nation’s elected leaders, who can be thrown out of office if the people disagree with them. It is not our job to protect the people from the consequences of their political choices.  (p. 6)

“In 2010, Congress enacted the Patient Protection and Affordable Care Act, 124 Stat. 119. The Act aims to in­crease the number of Americans covered by health in­surance and decrease the cost of health care.  … .

“The individual mandate requires most Americans to maintain ‘minimum essential’ health insurance coverage. 26 U. S. C. §5000A. The mandate does not apply to some individuals, such as prisoners and undocumented aliens. §5000A(d). Many individuals will receive the required cov­erage through their employer, or from a government pro­gram such as Medicaid or Medicare. See §5000A(f). But for individuals who are not exempt and do not receive health insurance through a third party, the means of satisfying the requirement is to purchase insurance from a private company.”  (p. 7)

“The Government advances two theories for the proposi­tion that Congress had constitutional authority to enact the individual mandate. First, the Government argues that Congress had the power to enact the mandate under the Commerce Clause. Under that theory, Congress may order individuals to buy health insurance because the failure to do so affects interstate commerce, and could un­dercut the Affordable Care Act’s other reforms. Second, the Government argues that if the commerce power does not support the mandate, we should nonetheless uphold it as an exercise of Congress’s power to tax. According to the Government, even if Congress lacks the power to direct individuals to buy insurance, the only effect of the indi­vidual mandate is to raise taxes on those who do not do so, and thus the law may be upheld as a tax.” (p. 15)

The Commerce Clause

“The Constitution grants Congress the power to ’regulate Commerce.’ Art. I, §8, cl. 3 (emphasis added). The power to regulate commerce presupposes the existence of com­mercial activity to be regulated.” (p. 19)

“The individual mandate, however, does not regulate existing commercial activity. It instead compels individ­uals to become active in commerce by purchasing a product, on the ground that their failure to do so affects interstate commerce.”  (p. 20)

“Congress already enjoys vast power to regulate much of what we do. Accepting the Government’s theory would give Congress the same license to regulate what we do not do, fundamentally changing the relation between the citizen and the Federal government.”  (pp. 23-24)

“The Framers gave Congress the power to regulate com­merce, not to compel it, and for over 200 years both our decisions and Congress’s actions have reflected this un­derstanding.” (p. 24)

“The Government argues that the individual mandate can be sustained as a sort of exception to this rule, because health insurance is a unique product. According to the Government, upholding the individual mandate would not justify mandatory purchases of items such as cars or broccoli because, as the Government puts it, ‘[h]ealth in­surance is not purchased for its own sake like a car or broccoli; it is a means of financing health-care consump­tion and covering universal risks.’ Reply Brief for United States 19. But cars and broccoli are no more purchased for their ‘own sake’ than health insurance. They are purchased to cover the need for transportation and food.” (p. 27)

“No matter how “inherently integrated” health insurance and health care consumption may be, they are not the same thing: They involve different transactions, entered into at different times, with different providers. And for most of those targeted by the mandate, significant health care needs will be years, or even decades, away. The proximity and degree of connection between the mandate and the subsequent commercial activity is too lack­ing to justify an exception of the sort urged by the Gov­ernment. The individual mandate forces individuals into commerce precisely because they elected to refrain from commercial activity. Such a law cannot be sustained under a clause authorizing Congress to ‘regulate Commerce.’ ” (p. 27)

Congressional Taxing Power

“The Government’s tax power argument asks us to view the statute differently than we did in considering its com­merce power theory. In making its Commerce Clause argument, the Government defended the mandate as a regulation requiring individuals to purchase health in­surance. The Government does not claim that the taxing power allows Congress to issue such a command. Instead, the Government asks us to read the mandate not as order­ing individuals to buy insurance, but rather as imposing a tax on those who do not buy that product.” (p. 31)

“Under the mandate, if an individual does not maintain health insurance, the only consequence is that he must make an additional payment to the IRS when he pays his taxes. See §5000A(b). That, according to the Government, means the mandate can be regarded as establishing a condition—not owning health insurance—that triggers a tax—the required payment to the IRS. Under that theory, the mandate is not a legal command to buy insurance. Rather, it makes going without insurance just another thing the Government taxes, like buying gasoline or earn­ing income. And if the mandate is in effect just a tax hike on certain taxpayers who do not have health insurance, it may be within Congress’s constitutional power to tax.” (p. 32)

“The exaction the Affordable Care Act imposes on those without health insurance looks like a tax in many re­spects. The ‘[s]hared responsibility payment,’ as the statute entitles it, is paid into the Treasury by ‘tax­payer[s]’ when they file their tax returns. 26 U. S. C. §5000A(b). It does not apply to individuals who do not pay federal income taxes because their household income is less than the filing threshold in the Internal Revenue Code. §5000A(e)(2). For taxpayers who do owe the pay­ment, its amount is determined by such familiar factors as taxable income, number of dependents, and joint filing status. §§5000A(b)(3), (c)(2), (c)(4). The requirement to pay is found in the Internal Revenue Code and enforced by the IRS, which—as we previously explained—must assess and collect it “in the same manner as taxes.” Supra, at 13–14. This process yields the essential feature of any tax: it produces at least some revenue for the Government.” (p. 33)

“Congress’s authority under the taxing power is limited to requiring an individual to pay money into the Federal Treasury, no more. If a tax is properly paid, the Government has no power to compel or punish individuals subject to it. We do not make light of the se­vere burden that taxation—especially taxation motivated by a regulatory purpose—can impose. But imposition of a tax nonetheless leaves an individual with a lawful choice to do or not do a certain act, so long as he is willing to pay a tax levied on that choice.” (pp. 43-44)

“The Affordable Care Act’s requirement that certain in­dividuals pay a financial penalty for not obtaining health insurance may reasonably be characterized as a tax. Be­cause the Constitution permits such a tax, it is not our role to forbid it, or to pass upon its wisdom or fairness.” (p. 44)

Most of the time your attorney will know which debts will be legally written off in your bankruptcy. But not always, for two reasons.


A couple of blogs ago I made the point that the discharge order entered on your behalf by the bankruptcy judge will write off all of your debts, EXCEPT for those types of debts which are on a list in Section 523 of the Bankruptcy Code. The most common ones on the list include:

a. most but not all taxes

b. debts incurred through fraud or misrepresentation, including recent cash advances and “luxury” purchases

c. debts which were not listed on the bankruptcy schedules on time

d. money owed because of embezzlement, larceny, or through other kinds of theft or fraud in a fiduciary relationship

e. child and spousal support

f. claims against you for intentional injury to another person or property

g. most but not all student loans

h. claims against you for causing injury or death to someone by driving while intoxicated (also applies to boating and flying)

These different types of debts each deserve a closer look, which I will do in upcoming blogs. But let’s go back to the question in today’s title. Most of the time your attorney can reliably tell you whether a particular debt will be discharged in your bankruptcy case. But sometimes he or she will not know because:

1. With some types of debts—the ones described in items b, d, and f of the list above—the debt is discharged unless that creditor raises an objection by a specific deadline (which is usually 60 days after your meeting with the trustee). If you are candid with your attorney about the facts at the beginning of your case, he or she can tell you if there is a risk that a particular creditor will object to the discharge of its debt. Your attorney may even be able to tell you roughly how much of a risk you have, depending on the facts, and sometimes on the reputation of that creditor to object under similar facts. But whether the risk is high or low, with these types of debts neither your attorney nor you will know for sure whether that debt will be discharged until either the creditor objects or the deadline for objection passes without objection.

2. With the other types of debts—the ones described in items a, c, e, g, and h of the list above—at the beginning of the case sometimes either the facts are not sufficiently clear or how the law should be applied to the facts is not clear, or both. You might think that the attorney should get all the necessary facts before filing the case. But sometimes the facts are simply not available, the additional work to get them is not worth the cost, or there is no time to do so because of the need to file the case quickly. Add in the consideration that the bankruptcy statutes often use broad language that can be and is in fact interpreted differently by different judges. As a result, in these situations there is simply no absolute way to know at the start of the case whether a particular debt will be discharged.

Take as an example one of the types of debt listed—a claim against you for causing personal injury to someone by driving while intoxicated. You might think that sounds relatively clear. But not necessarily. What if the accident occurred in a rural area so that the police did not arrive on the scene until well after accident, making unclear whether you were “intoxicated”? What if there wasn’t enough evidence for a criminal conviction but possibly enough for a civil verdict against you? What if the injured driver was also arguably intoxicated? Under these kinds of circumstances, the pertinent facts may not be known until a possible future trial. And even if the facts were clear, the law may not be settled about how to apply those facts to come to a decision. So you can see that in these “gray areas” your attorney may well not be able to tell you in advance whether that particular debt will be discharged.

I need to finish by emphasizing again that most situations are not gray but are black and white, or at least close to it. So usually your attorney CAN tell you with a high degree of confidence whether any particular debts will or will not be discharged. Indeed, in a large percentage of Chapter 7 cases all debts that you want will be discharged. And if you have debts that won’t be discharged—such as support obligations or recent income taxes—that will be quite clear. The point of this blog has been to explain why there are some situations when it is not so clear, when your attorney must make a judgment call based on the likelihood of an objection by a creditor, or based on imprecise facts and/or law.


In most Chapter 7 “straight bankruptcies,” most debts are legally written off, especially debts that are not secured by any collateral and don’t belong to any of the special “priority” categories of debt. But how about in a Chapter 13 payment plan? What determines whether these creditors get paid, and if so how much?

The beauty of Chapter 13 is that it is both flexible and structured. Flexibility allows Chapter 13 to help people with wildly different circumstances. Structure—the set of rules governing Chapter 13—is important because clear rules balancing the rights of debtors and creditors reduces disputes between them. There is only so much money to go around to the creditors, so less fighting means less precious money spent on attorneys and more available for satisfying the creditors. And then getting on with life.

How much the general unsecured debts get paid in any Chapter 13 case is a reflection of these two themes working together. These are illustrated through the following rules, and their impact on the payout to these creditors.

1. Creditors which are legally the same are treated the same. So, all general unsecured creditors get paid the same percent of their debt through a Chapter 13 plan.

2. For any creditor—including a general unsecured one—to share in the distribution of payments, it has to file a proof of claim on time with the bankruptcy court. A general unsecured creditor which fails to file this simple document stating the amount and nature of the debt will receive nothing through the plan, and the debt will be discharged at the end of the case if it completed successfully.

3. The failure of one or more creditors to file its proof of claim usually, but not always, means that there will be more money available for the other creditors. Two exceptions: a “0% plan,” in which the general unsecured creditors are receiving nothing; or a “100% plan,” in which these creditors are being paid the entire amount of their debts.

4. “0% plans” are those in which all of the money paid by the debtor through the Chapter 13 trustee is earmarked to pay secured creditors, “priority” creditors (such as taxes and child/spousal support), and/or trustee and attorney fees. Some bankruptcy courts frown on “0% plans,” especially in certain situations, such as when there does not seem to be good reason to be in a Chapter 13 case instead of a usually much less expensive Chapter 7.

5. “100% plans” are those in which all of the general unsecured creditors’ debts are paid in full through the trustee. These happen primarily for two reasons. The debtors:

a. are required to make payments based on their budget, which provides enough money over the course of the case to pay off their debts in full; or

b. own more non-exempt assets which they are protecting through their Chapter 13 case than they have debts, which requires them to pay off their debts in full.

6. A major consideration for how much the general unsecured creditors receive is how long the debtors are required to pay into their Chapter 13 case. Generally, if debtors’ pre-filing income is less than the published “median income” for their applicable state and family size, then they pay for 3 years into their plan. If their income is more than that amount, they must pay for 5 years instead. The length of the case obviously affects how much is paid in, and so usually affects how much the general unsecured creditors receive.

7. Payments to general unsecured creditors can be affected by changes which occur during the case—income increases or decreases adjusting the plan payment amount, unexpected tax refunds and employee bonuses paid over to the trustee, and even additional allowed debtors’ attorney fees reducing what is available to the creditors.

8. Once the general unsecured creditors receive whatever the Chapter 13 plan provides for them (and the rest of the plan requirements are met), the remaining balances are legally discharged. The result is that all general unsecured creditors receive the same pro rata share, and that’s the end of the story for them. The exception is the relatively rare creditor which succeeds during the case in convincing the court that its debt should not be discharged at all. This only applies to situations involving a debtor’s fraud or other similar significant wrongdoing, and only if the creditor raises the issue by a very strict deadline just a few months into the case. This creditor still shares in the distribution of payments to all the general unsecured creditors. But at the end of the case, there is no discharge of its remaining debt, which the creditor can then pursue against the debtor.

Clearly, a lot of considerations go into how much the general unsecured creditors will be paid in any Chapter 13 case. There are many interacting rules to be applied to the unique financial and human factors of each case.

The most practical questions you likely have if you are considering bankruptcy is what it will do to each of your debts. Will you still owe anything to anybody? What about debts you want to keep like a vehicle loan or mortgage? How to handle special debts like income taxes and child support?

To understand bankruptcy you need to understand debts. One of the most basic principles of bankruptcy is that it treats all creditors in the same legal category the same as all the other creditors in that category. So the first step in understanding debts is to understand the three main categories of debts. Not everybody has debts in each of these categories, but lots of people do. At the end of this blog, you should be able to at least start dividing your debts among these three categories. From there, bankruptcy and how it deals with each of your creditors will start making more sense.

The three categories are “general unsecured debt,” “secured debt,” and “priority debt.”

Secured Debts

All debts are either secured by collateral or not. Whether or not a debt is secured is often very straightforward, such as with a vehicle loan in which the vehicle’s title specifies your lender as the lienholder. That lien on the title, together with the documents you signed with that lender, gives that lender certain rights as to that collateral, such as the right to repossess it if you fail to make payments.

In the case of every secured debt, there is a legally prescribed way to attach the debt’s collateral to the debt. In the case of the vehicle loan, the lender and you have to jump through certain hoops for the lender to become a lienholder on the title. If those aren’t done right, the vehicle might not attach as collateral to your loan.

Debts can be fully secured or only partially secured. If you owe $10,000 on a vehicle worth only $8,000, the debt is only partially secured—secured as to $8,000, and unsecured as to the remaining $2,000 of the debt.

Debts can be voluntarily or involuntarily secured. Examples of the latter are judgment liens on your home, IRS income tax liens on all your personal property, and a mechanic’s or repairman’s lien on a vehicle that’s been repaired and the repair bill not paid.

General Unsecured Debts

All debts that are not legally secured by collateral are simply unsecured debt. And “general” unsecured debts are simply those which do not belong to any of the categories of “priority” debts (discussed below). So general unsecured debts are the default category—if a debt is not secured and not a priority debt, it’s a general unsecured one. They include every imaginable type of debt or claim. Common ones include most credit cards, essentially all medical bills, personal loans without any collateral, bounced checks, most payday loans (although those sometimes have collateral), unpaid rent and utilities, balances left over after a vehicle is repossessed, many personal loans, and uninsured or underinsured motor accident claims against you.

Sometimes debts which were previously secured can become general unsecured ones, and vice versa. An example of the first: once you’ve surrendered all the collateral—such as a vehicle on a vehicle loan—any remaining debt is general unsecured. And an example of the second: a general unsecured medical bill can become secured after a lawsuit is filed against you and a judgment entered, resulting in a judgment lien attached to your real estate.

Priority Debts

Just like it sounds, priority debts are special ones that the law has selected to be treated better than general unsecured debts. In fact, there are very specific levels of priority among all the priority debts.

It’s all about who gets paid first (which often means who gets paid at all). This comes up in two main ways.

First, most Chapter 7 cases don’t involve the trustee receiving any of your assets for distribution to your creditors. But in those cases where there are non-exempt assets, the priority creditors are paid in full before the general unsecured ones receive anything. And the higher priority creditors are paid in full before the lower priority ones.

Second, in a Chapter 13 case, your formal plan has to show that you will pay all priority debts before the completion of your case, and then you must in fact do so before you are allowed to finish it.

The most common priority debts for consumers or small business owners are the following, in order starting from the highest priority:

• child and spousal support—amounts owed as of the time of the filing of the bankruptcy case

• the administrative costs of the bankruptcy case—trustee fees and costs, and in some cases attorney fees

• wages and other forms of compensation owed to employees—maximum of $10,000 per employee, for work done in the final 180 days before the bankruptcy filing or close of business, whichever was first

• certain income taxes, and some other kinds of taxes—some are priority but others are general unsecured if they are old enough and meet some other conditions

In the next blog I’ll get more into how debts in each category are treated in Chapter 7 and Chapter 13.


Could your small business survive and even thrive if you could just get better terms for payment of your back tax debts?

The owners of just about every struggling sole proprietorship have income and business tax problems. When you are barely scraping by, needing every dollar to pay the absolutely necessary keep-the-business-running expenses, you can find yourself unable to scrape together the money to make your estimated personal income tax payments each quarter. If you have an employee or two, it can be all too tempting to use the withheld payroll tax money for some critical business or personal expense instead of paying it over to the IRS. So even when business improves, once you fall behind with your taxes it’s terribly difficult to catch up, to be simultaneously paying both your current and past tax obligations. This especially true considering accruing late charges and interest, which can greatly increase the amount you must pay to catch up.

Add to the mix the IRS’ limited flexibility on payment terms for back taxes, plus its extraordinary collection powers against you and against your business and personal assets, and it’s no wonder that back taxes are often the most urgent problem for a business owner trying to figure out what to do.

If your business is a sole proprietorship in your name, or in your name and that of your spouse, a Chapter 13 case would very likely give you a series of advantages in dealing with your past due tax liabilities, while allowing your business to continue to operate. (If your business is instead in the form of a corporation, or if your debt amount is larger than a certain threshold, you may not qualify for Chapter 13 but instead need to consider Chapter 11 or other options, a discussion which is beyond the scope of this blog.)

A Chapter 13 bankruptcy could help your business survive by significantly reducing both your business and personal monthly debt obligations, and the tax debts themselves as well as the rest of your debts. As for the back taxes:

• some of the taxes or penalties may be written off (“discharged”) altogether;

• payments on the remaining tax debts would usually be stretched out over a much longer period than the taxing authorities would otherwise allow, thereby greatly reducing the amount you would need to pay each month; and

• ongoing interest and penalties usually stop accruing, so that the payments you make pay the tax debts off much more quickly.

So Chapter 13 almost always gives you both immediate month-to-month relief easing your business and personal cash flow, and long-term relief reducing what you must pay before you are tax debt free, and completely debt free.


Get the maximum benefit from your bankruptcy against your taxes by following these sophisticated strategies.

Pre-bankruptcy planning to position a debtor in the best way for discharging or for otherwise favorably dealing with tax debts is one of the more complicated tasks handled by a bankruptcy attorney. Do NOT attempt these strategies, including the five mentioned here, without an attorney, indeed frankly without an attorney who focuses his or her law practice on bankruptcy. Elsewhere in this website I make clear that you cannot take anything in this website, including what I write in these blogs, as legal advice. That’s especially true in this very sophisticated area. Also, I could write a chapter in a book on each of these five strategies, so all I’m doing here is introducing you to them, to begin the discussion when you come in to see me.

1st:  Wait out the appropriate legal periods before the filing of your bankruptcy case.

As you may know from elsewhere in these blogs, most (but not all) forms of income tax become dischargeable after the passing of specific periods of time. Much of pre-bankruptcy tax strategy turns on figuring out precisely when each of your tax liabilities will become dischargeable, and then either waiting to file bankruptcy until all those liabilities are dischargeable, or, when under serious time pressure to file, at least when the maximum amount will be discharged as is possible under the circumstances.

2nd:  File past-due returns to start the clock running on those as soon as possible.

If you know you owe taxes for prior years and don’t have the money to pay them, your gut feeling may well be to avoid filing those tax returns in an attempt to “fly under the radar” as long as you can. But irrespective of any other rules, you cannot discharge a tax debt until two years after the pertinent tax return has been filed. Get good advice about how to deal with the IRS or other taxing authority during those two years so that you take appropriate steps to protect yourself and your assets. You deserve a rational basis for getting beyond your understandable fears about this.

3rd:  Try to stay in compliance with the new tax year(s) while you wait to file your bankruptcy case, by designating tax payments to the more recent tax years instead of older ones.

Because recent tax year tax liabilities cannot be discharged in a Chapter 7 case and must be paid in full as a priority debt in a Chapter 13 case, you want to try to stay current on your most recent tax debts. It’s also usually a necessary step in keeping the IRS and its ilk from taking aggressive action against you, thus allowing you to wait longer and discharge more taxes. With the IRS in particular you can and should explicitly designate which tax account any particular tax payments are to be applied to achieve this purpose.

4th:  Avoid tax fraud and evasion, and whenever possible, withholding taxes.

Simply put, you can’t ever discharge any taxes related to fraud, fraudulent tax returns, or tax evasion, so avoid these kinds of illegal behavior. If you have any doubt, talk to a knowledgeable tax accountant or attorney. Unpaid tax withholdings also cannot be discharged, so either try to avoid them from accruing, focus your resources on paying them off, or just recognize that they will either have to be paid after your Chapter 7 case or as a priority debt during your Chapter 13 case.

5th:  Be aware of tax liens.

Tax lien claims have to be paid in full in Chapter 13, with interest, and can survive a Chapter 7 discharge. So try to avoid having the taxing authority record a tax lien against you—admittedly sometimes easier said than done. Or if that is not possible, at least refrain from building up equity in possessions or real estate. That equity, although often exempt from the clutches of the bankruptcy trustee and most creditors, is still subject to a tax lien. So any built up equity just increases what you will have to pay to the taxing authority on debt you might otherwise been able to discharge completely.

Dealing with taxes from a failed business through a bankruptcy—that sounds complicated. But I’m going to keep it simple here. What are your basic options if you owe taxes after closing down a small business?

You have two choices (once it’s clear that you need to file a bankruptcy because of the amount of your debts):

1. File a Chapter 7 case to discharge (legally write-off) all the debt that you can, perhaps including some of the taxes, and then deal directly with the taxing authorities about the remaining taxes.

2. File a Chapter 13 case to discharge all the debt that you can, perhaps including some of the taxes, and then pay the remaining taxes through that same Chapter 13 case.

In real life, especially after a messy situation like the shutting down of a business, many factors usually come into play in deciding whether a Chapter 7 or 13 is better for you. But focusing here only on the taxes, it comes down to this core question: Would the amount of tax that you would still owe after completing a Chapter 7 case be small enough so that you would reliably be able to make reasonable arrangements with the Internal Revenue Service (or other applicable taxing authority) to satisfy that obligation within the following two years or so?

Chapter 13 protects you from the collection powers of the taxing authorities during the usual three to five years while you are fulfilling your obligations under the case.  You should be in a Chapter 7 case only if you don’t need that protection. That means your attorney needs to be able to tell you 1) what tax debts will not be discharged in a Chapter 7 case, and 2) what payment or other arrangements will you likely be able to make to take care of those remaining taxes.  

How reliably anyone can predict how a particular taxing authority will respond about a surviving tax debt depends on the circumstances. For example, the IRS has some rather straightforward policies about how long a taxpayer has to pay off income tax obligations below a certain amount. In contrast, predicting whether or not the IRS will accept a certain “offer-in-compromise” can be much more difficult to predict.  If you cannot get rather strong assurances that you will be able to reasonably handle what the taxing authorities will require, you may well be better off within the protections of Chapter 13.

Not only does Chapter 13 give you protection from the tax authorities, you would likely be permitted to pay less to them per month towards the not-discharged taxes. That’s because your living expense budget in a Chapter 13 case will likely be more reasonable than when you’re dealing directly with the IRS after a Chapter 7 case. Furthermore, unlike the after-Chapter 7 situation, penalties would not continue to accrue, and in most cases neither would interest. As a result, in a Chapter 13 case most likely you would pay less money to finish off the tax debt.

Again, the bottom line: once you know how much tax debt will survive a Chapter 7 case, do you have a reasonable and reliable means of paying it off or settling it within about two years? If so, do the Chapter 7 case. Otherwise, take advantage of the greater protection and likely more reasonable budgeting in Chapter 13.