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Paying Back Tax Debt in a Colorado Chapter 13 Bankruptcy

August 11, 2010

By: David M. Serafin

Being both a Denver bankruptcy lawyer and a tax lawyer, and most areas of Colorado, allows me to expound on one of my favorite subjects: the feasibility of paying back tax debt in chapter 13.

Even if the bankruptcy debtor’s income is low enough and the debtor passes the chapter 7 Means Test in Colorado, it still may be preferable to file for chapter 13, depending on the type and amount of tax debt owed to the IRS or Colorado State Department of Revenue.

First, only income tax debts which are three years or older may qualify for an outright bankruptcy discharge. So, anybody owing non-income tax related debts, such as payroll taxes or property taxes, or anybody who has tax debts less than three years old, simply cannot discharge these debts. (And the focus of the remaining portion of this article will focus upon advising clients who are contemplating paying the tax arrears back in a chapter 13 payment plan, as opposed to complete discharge of tax debts.)

Chapter 13 involves a reorganization of debts. The monthly plan payment is often determined by measuring a debtor’s monthly income versus expenses. The balance remaining (if possible) constitutes disposable income, which is required to be paid back to unsecured creditors through the chapter 13 trustee. (In chapter 13, you’ll be required to live within your means by continuing to make your regular monthly payments on secured debts and student loans directly to the creditor IN ADDITION TO your plan payment. The Colorado Bankruptcy Court will dismiss or convert your case to chapter 7 if you cannot make the chapter 13 plan payment.)

Depending on a client’s income and expenses, and assets and debts, it may be feasible to also pay back tax debt (in addition to any required payments to unsecured creditors) in a plan. One concern is making sure that the amount owed is neither too high nor too low. For instance, a bankruptcy debtor with $5,000 or less in tax debt, with little or no other debts, may be better served by foregoing the costs and hassles of a chapter 13 filing and simply commencing a monthly installment plan with the taxing authority. On the other hand, a bankruptcy debtor with too high of a tax debt ($50,000 plus) may not be able to successfully make all of the plan payments required for a chapter 13 discharge, particularly if the plan also requires payments to unsecured creditors, such as for credit cards or medical bills.

Nonetheless, a chapter 13 plan with a repayment provision for tax debt can save a bankruptcy debtor thousands of dollars because, as of the date the petition is filed, no further interest or penalties can be assessed on the underlying tax. Over the course of a 3 to 5 year payment plan, the foregone interest or penalties alone may be a reason justifying filing for chapter 13.

Client Reviews
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David Serafin is a talented and respectful attorney that works hard to get the best results for his clients. He's thorough at reviewing client cases and patient at explaining all the available options. I would certainly recommend him to anyone searching for help with a bankruptcy, a tax situation or estate planning. A. K.
★★★★★
Mr. Serafin is a consummate professional and his hard work and legal advice are second to none. He will give you outstanding personalized legal service, and you will be glad you chose him as your attorney. While some lawyers have a bad reputation for lacking ethics, Mr. Serafin holds himself to the highest of ethical standards and is in good standing with the Colorado bar. Pick Mr. Serafin for your tax and other legal needs - you will be glad you did. R.S.
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If you are in need of a excellent attorney who will provide you support, guidance, professionalism, and most importantly, INTEGRITY. David does it all! I would not pass up his due diligence! R. T.