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Non-Priority Versus Priority Tax Debts In Chapter 13 Bankruptcy: How To Know The Difference

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Chapter 13 bankruptcy is an option for Americans seeking relief from a variety of debts, and that includes tax debts in most cases. In general, debts of all kinds, including back taxes owed, are divided into one of two categories: non-priority and priority debt. The laws providing for Chapter 13 bankruptcy delineate how tax debts are categorized. Below is more information on how to know if your tax debt will be considered as non-priority debt or priority debt:

Non-priority tax debt

Non-priority tax debt is the favored category among bankruptcy filers since non-priority debts, in general, are not likely to require full repayment. It is unusual for a Chapter 13 bankruptcy filer to pay the full amount of non-priority debts, and that can be a great relief for individuals seeking to reduce their tax burden.

However, before tax debt can be automatically lumped into the non-priority category of debt, it must meet certain criteria under federal bankruptcy laws. Here is a brief summary of those criteria:

  • Must be income tax debt – any other form of tax debt, including property taxes, is automatically excluded from being considered as  non-priority debt.
  • Must meet date and age criteria – there are several date and age criteria that must be met before a tax debt can be classified as "non-priority". For example, tax debt that is less than three years of age cannot qualify. Other date and age criteria include restrictions related to filing deadlines and dates as well as tax assessment dates.
  • Must be tax debt free from taint of criminal activity – if you commit tax evasion or fraud, then the tax debt in question is automatically excluded from consideration as a non-priority debt. Note that this does not apply to good-faith errors in filing taxes or an inability to pay taxes.

Note that a bankruptcy court has authority to make some exceptions and may move non-income tax debt into the non-priority tax debt category, for example, if the judge finds such a decision to be justifiable.

Priority tax debt

Priority debts are those that take precedence over all other debts in a Chapter 13 bankruptcy filing. Typically, secured debts, such as mortgages, car loans, and other obligations backed by a material possession, cannot be discharged as a non-priority debt and must be repaid in full. For tax debt, this is no different; below are several specific types of tax debts that will require full repayment:

  • Liens associated with tax debt – if a lien has been filed on real estate or personal property by a legal taxing authority, then the tax debt also becomes secured. That will place such debt within the priority debt category.
  • Certain types of tax debt – debts that are required to be collected from an employee's check, such as social security or unemployment taxes, are automatically considered priority tax debts.
  • Recent taxes on property – property taxes that are less than two years past due are automatically assigned as priority tax debt.

Despite the more rigid requirements associated with priority tax debts, it is advantageous to include them in a Chapter 13 bankruptcy filing. Taxing authorities can attach crippling interest and penalties to taxes due, but Chapter 13 bankruptcy courts will often relieve filers of all non-principal charges and provide additional time to pay a debt.

What happens next

The above information summarizes the categorization of tax debt, but it only scratches the surface of bankruptcy law as it relates to tax debt. If you are considering filing Chapter 13 bankruptcy and owe back taxes, then you need the guidance and assistance of a qualified bankruptcy attorney. Only an attorney can help you wade through the complexities of tax law and assist you in getting the tax relief you need.