If you expect to owe 2012 income tax, you may be able to take care of it simply by paying less to your other creditors.
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If you owe no taxes except from the 2012 tax year, your best course of action may be to get rid of all or most of your other debts through a Chapter 7 “straight bankruptcy” so that you can then pay off the 2012 tax through reasonable monthly installments payments.
But your tax debt may be too large for that. Or you may have other reasons to file a Chapter 13 “adjustment of debts” instead. If you do file a Chapter 13 case to take care of income tax you owe from 2012, you may be able to do so without paying anything more than if you had not owed that tax.
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Payment of 2012 Income Taxes in Chapter 13 Case
Chapter 13 is a very flexible procedure, especially appropriate for taking care of income tax debts. Focusing on any 2012 income tax that you may owe, now that December 31, 2012 has passed, the income tax for that year CAN included in a Chapter 13 case filed for you after that date. In fact, that 2012 income tax MUST be paid in full under the terms of your Chapter 13 plan. But the requirement that you pay that tax in full can be used to your advantage in every Chapter 13 case, but especially so in certain cases.
The Benefit of Paying Your 2012 Income Tax Debt in Any Chapter 13 Case
No matter what else is going on in your Chapter 13 case, you get three major benefits for paying your 2012 taxes through it.
1. You are protected from the IRS (and any applicable state income tax agency) during the repayment process, unlike in an after-Chapter 7 installment payment plan that you would directly arrange with the IRS/state.
2. You have much more flexibility on the terms for paying the 2012 tax, including the ability to delay paying anything while focusing on even higher priorities (such as a home/vehicle/child support arrearage).
3. No additional interest or penalties are added while you are in the Chapter 13 case, so you will pay less while paying off the 2012 tax debt.
Paying Off Your 2012 Tax For Free
Sometimes the fact that you owe some recent income taxes can cost you absolutely nothing beyond what you would have had to pay anyway to your creditors overall through your Chapter 13 case. How could this be?
The justification for this comes from the Chapter 13 requirement that you must pay all your “disposable income” into your plan each month during the required period of time. Usually that means that all your creditors are scheduled to receive a certain percent of the debt you owe them. Some special creditors—usually secured and “priority” ones—are paid first, and then whatever is left over is divided among the “general unsecured” creditors. As long as the total 2012 tax is no more than the total amount that is scheduled to be paid to the “general unsecured” creditors, then usually the tax is paid in full simply by taking it out of what would have been paid to the “general unsecured” creditors.
An Example
Consider this overly simplified example: if a debtor’s “disposable income” was $300 per month, and she was required to pay into her Chapter 13 plan for 36 months, AND she had no debts except “general unsecured” ones totaling $18,000, then (assuming no trustee or attorney fees for the sake of simplicity), she would be paying $10,800 (36 months times $300 per month) towards the $18,000 in “general unsecured” debts, or 60 cents on the dollar.
But now assume that this debtor has a 2012 income tax debt of $8,000. She would still pay $300 per month for 36 months, but now the $8,000 income tax would be paid out of that first, reducing the amount paid out to the “general unsecured” creditors. Those creditors would receive only $2,800 ($10,800 minus $8,000) out of the $18,000 owed to them, only about 15 cents on the dollar.
So, in this example this $8,000 of 2012 income tax debt does not change what the debtor is obligated to pay during the life of the Chapter 13 case. It just shifts that $8,000 amount from the “general unsecured” creditors to the 2012 tax.