BankruptcyLawyerHonolulu: Chapter 13 Taxes & Feasibility Issues. Filing a 7 or a 13 before the lien has some advantages.
Best Interests Test and the Feasibility Test: Essentials for Chapter 13 plan approval
Best Interests Test and the Trustee's Motion to Dismiss for Lack of Feasibility: A Chapter 13 plan must satisfy the "best interests test under Section 1325(a)(4) of the Bankruptcy Code to be confirmed by the court. This test requires that the total payments made on your unsecured claims cannot be less than the amount that they would receive if your estate (less exemptions) were liquidated under a Chapter 7. In other words, if a debtor files a Chapter 13 and has non-exempt assets, the value of the non-exempt assets must be paid into the plan to pass this "Best Interests Test". Depending on your assets and exemptions, it is possible then to pay nothing to your unsecured creditors and still pass this best interests test, but at the same time you may not want to submit a 0% plan, see In re: Paula Walls (a North Carolina bankruptcy case decided in 2010), where the debtor proposed to pay 0% to her unsecureds and keep a luxury Lexis auto lease at $1,000 a month, the court agreed with the trustee that the debtor had an ability to pay more and therefore dismissed her case under the "totality of circumstances" test. The lesson to be learned from this case is that if you want a 0% plan to be accepted by the court, you should make sure that you've done some serious belt tightening first. I personally feel that submitting a 0% plan is a red flag that will definitely invite scrutiny from the U.S. Trustee's office, and if there is the slightest ability to pay more due you can expect a challenge to plan confirmation. See also http://www.avvo.com/legal-guides/ugc/chapter-13-plan-zero-payment-plan-to-unsecured-creditors.
The second part to getting your Chapter 13 plan approved by the court when you have tax debts relates to "feasibility" issues. Drafting a workable Chapter 13 plan for someone who has tax liens filed both by the IRS and the State of Hawaii is probably one of the most challenging areas of bankruptcy practice. If the trustee determines from the proofs of claims actually filed that the plan is not feasible, i.e. there will be insufficient funds to pay in full all administrative expenses (lawyer fees and trustee fees), secured claims (plus interest), priority claims, and any claims placed in a special class for full payment (such as back child support or alimony), the trustee will file a motion to dismiss the case for "lack of feasibility". If you owe the IRS or the State of Hawai back taxes, your plan must provide for proper treatment of these taxes in order for your plan to be approved.
Basically there are three types of tax debts in bankruptcy: Secured tax debts, Priority tax debts, and general unsecured tax debts. You must know how to treat these debts in order for your plan to be confirmed without opposition from either the trustee, the IRS or the Department of Taxation State of Hawaii. You also need to know what taxes are dischargeable to be able to draft a successful Chapter 13 plan. Dischargeable taxes are treated as unsecured general claims, if a lien is filed however, they become secured claims if the debtor has assets. Non dischargeable taxes are priority tax debts. Secured tax debts are comprised of general unsecured tax debts as well as priority tax debts depending on the facts of your case. To meet feasibility requirements, all of your priority tax debts must be paid in full under your Chapter 13 plan, and if you want to keep all of your assets then your Chapter 13 plan must provide for payment in full of all secured tax debts (plus interest) in addition. You could also surrender your assets as part of your plan in lieu of paying for them if that is your choice. General unsecured tax debts will be paid like your other unsecured creditors and so long as the best interest test is met, you need not pay them back 100%. If you filed for bankruptcy before a tax lien is filed then your debts could either be a priority tax debt or an unsecured tax debt, or a combination thereof, but it will not consist of a secured tax debt. Accordingly, a secured tax debt arises only when either a federal or state tax lien was filed BEFORE the debtor files for bankruptcy. Assets that you list in your bankruptcy, for example real estate, car and other property that you own would be considered to be "secured" by the tax lien and your plan must provide full payment for this secured tax debt. So for example if there is a federal tax lien and the equity in your property is worth $15,000 your plan must provide for its full payment and you will have up to five years to pay that off. As it pertains to income taxes, whether a tax is priority or not will depend when or if you filed a tax return, when it was filed, whether there were any extension requests, date of assessment and the tacking on of various "tolling periods". If you fail to pass this test then the taxes are "priority taxes" and must be paid in full under your plan. If you have trust fund employment taxes, since the trust fund portion is not dischargeable in bankruptcy, it would be considered as a priority tax in your Chapter 13. A general unsecured tax is one that basically passes the bankruptcy discharge test. These are the best kind of taxes to have since you don't have to pay them off in full under your plan (unless of course you have proposed a 100% payment plan to all of your creditors). To be feasible then if there are tax liens your plan at the very least must provide for payment in full of all priority taxes and the value of the combined equity in all of your assets that are covered by the lien (these are your secured taxes). So if you anticipate that a tax lien will be filed against you soon, it maybe to your advantage if you file a Chapter 7 or Chapter 13 bankruptcy BEFORE a tax lien is filed. Under Chapter 7 the tax lien is never "discharged" because it is a statutory lien and not a judicial lien that can be avoided under 11 USC 522(f). In a Chapter 13, you can strip off or strip down your federal tax lien, but your plan must be feasible.
If you have both federal and/or state tax liens a motion to value collateral or property as part of your plan is required to determine the amount of the "secured debt" held by the taxing entity. If you have tax liens filed by both taxing entities a stipulation is entered into which addresses the issue of the secured amount held by each entity. Although you would think it should be based upon who filed their lien first, in Hawaii the taxing authorities, for now anyways, have decided to go this route. Once the stipulation is filed with the court, both taxing authorities must then follow through with the agreement by filing amended proofs of claims to reflect the terms of the stipulated agreement....no one said bankruptcy and taxes was easy, it can and does get very, very complicated, especially if the debtor has assets and liens were filed prior to the bankruptcy filing. As the trustee will pay each entity based upon filed proof of claims, the amended proof of claims, post stipulation is necessary for proper payment under the plan. You must check to see that the "secured claim" amount in the amended proof of claim is exactly the same as the agreed upon stipulated "secured claim" amount. You must also check to see if any taxing agency's "priority claim" amount was increased in the amended proof of claim. Sometimes the amended proof of claim will affect feasibility, especially when a priority claim is increased when a secured claim is decreased because of the stipulation, and if that should happen, you will have to modify your plan to meet the new feasibility requirements.
For more reading material on this issue see: http://www.uscourts.gov/FederalCourts/Bankruptcy/BankruptcyBasics/Chapter13.aspx and http://ohiobankruptcysource.com/dismiss-chapter-13-for-lack-of-feasibility/
If you owe the IRS taxes here are some of your options: http://hubpages.com/hub/BankruptcyLawyerHonolulu-What-to-do-if-you-owe-IRS-taxes
Date of this Article: March 2011
About the Author:
Attorney Brian Kawamoto is an experienced bankruptcy and tax attorney in Honolulu, Hawaii. His practice includes filing consumer bankruptcy cases. As a former IRS Tax Attorney, his practice also includes discharging taxes in bankruptcy*, as well as reducing or eliminating certain taxes thru non-bankruptcy alternatives, such as by negotiating with the IRS for Offers in Compromise.
*For more information if you are interested in tax matters the author's website is http://www.irstaxbuster.com
Disclaimer - It is advised that you consult a bankruptcy attorney or lawyer in your state when dealing with your individual situation as the bankruptcy laws are complex and changes from time to time, also every state has different laws, rulings and court decisions as it concerns bankrutpcy matters.. Statements made here reflects the author's viewpoint for general reading purposes only and therefore should not be relied upon or considered as a legal opinion or legal advice for your own particular factual situation. Each situation is fact specific, and it is impossible to evaluate a legal problem without a comprehensive consultation and review of all the facts and documents at issue.