Bankruptcy – Can the IRS Sink My Chapter 13?
In some Chapter 13 cases, the IRS can sink the entire case.
I recently had a client from Dalton, Georgia who owed the Internal Revenue a significant amount of nondischargeable payroll taxes but had worked out a long term payment plan. Their pre-bankruptcy plan with the IRS was to pay the debt in installments over approximately fifteen years. These clients had no problem making their bankruptcy plan payments and paying the IRS directly. Their Chapter 13 plan was to pay all of the creditors 100 cents on the dollar. Unfortunately for the clients and their other creditors, the IRS filed an objection to confirmation and insisted that the entire tax debt owed be paid in the bankruptcy plan (the maximum length of a Chapter 13 plan is 60 months). Once this large IRS debt was crammed into the five year Chapter 13 plan, the clients could not afford the payment. As a consequence, the case was dismissed.
I spoke a representative from the Internal Revenue who told me that the Service will not allow bankruptcy debtors in Northwest Georgia to make direct payments to the IRS once a Chapter 13 bankruptcy case is filed. I was told that they never make any exceptions. The representative understood the entire situation and the fact that the plan was to repay all creditors one hundred cents on the dollar. I tried to convince her that the Internal Revenue Service would be in a much better position at the end of the bankruptcy case because all of the other creditors would be paid off and the clients would then be in a position to make increased payments toward the IRS debt. Furthermore, at the end of this bankruptcy, the Internal Revenue Service would have been the debtor’s only remaining creditor. I was told that the Service would not bend on this policy.
Nothing in the Bankruptcy Code requires the Internal Revenue Service to take a back seat to other creditors. When nondischargeable taxes are owed, the Internal Revenue Service has the right to insist that the entire debt be paid in the Chapter 13 case. In Northwest Georgia, they are going to exercise this right.