IRS Priority Debt in Chapter 7

TaxLiab

Do you owe tax debt to the Internal Revenue Service (IRS), and are you considering Chapter 7 bankruptcy in order to have that debt discharged? If you are thinking about personal bankruptcy due to consumer debts or liquidation bankruptcy for your restaurant or small business in the Tampa Bay area, it is important to understand what bankruptcy law means when it refers to “priority” debts, as well as how “nondischargeable” debts can affect your ability to deal with tax debt through bankruptcy.

Generally speaking, priority debts refer to the debts that will be paid first in a bankruptcy proceeding. The matter of priority debts, including tax debt, can get complicated when the debt is both a priority debt and a debt that cannot be discharged through bankruptcy, which is often true. We will tell you more about IRS priority debt and dischargeability in Tampa bankruptcy cases.

Understanding Priority Debt in Bankruptcy 

What is priority debt? Under the Bankruptcy Code, the “distribution of property of the estate” is done in a particular order that prioritizes certain creditors over others. In other words, certain creditors have priority when it comes to getting repaid from the bankruptcy estate. There are priority debts that can affect both small business owners and consumers alike, including but not limited to the following:

  • – Wages or commissions that are owed within a particular period of filing for bankruptcy;
  • – Employee benefits owed within a particular period of filing for bankruptcy;
  • – Alimony or spousal maintenance;
  • – Child support;
  • – Personal injury or wrongful death damages or settlements owed as a result of impaired driving; and/or
  • – Income taxes that the debtor owes that were due within three years prior to the Chapter 7 bankruptcy filing.

Some of these debts are dischargeable in bankruptcy, and some of them are not dischargeable. For instance, alimony and child support are both priority debts, and both are nondischargeable through a liquidation bankruptcy proceeding. What about income taxes and owing the IRS money?

Tax Debt: Understanding Priority Debt and When It Cannot Be Discharged 

Under § 523 of the U.S. Bankruptcy Code, there are numerous exceptions to discharge. This includes tax debt owed to the IRS in many circumstances, especially recent tax debt. In order for a tax debt to be dischargeable, it must meet the following two conditions:

  • – There was a period of more than two years between your submission of the tax return to the IRS and your filing for Chapter 7 bankruptcy; and
  • – There was a period of more than three years between the due date of your tax return to the IRS and your filing for Chapter 7 bankruptcy.

If both of the above are true, then tax debt may be dischargeable through bankruptcy. However, as you can see, for more recent tax debt, the debt likely will be nondischargeable. It is still a priority debt, however. Why does this matter? When tax debt owed to the IRS is nondischargeable but is a priority debt, the debtor can benefit by having more of the nondischargeable debt paid off.

Benefit to the Debtor When Tax Debt is a Nondischargeable Priority Debt 

Imagine that you owe $25,000 to the IRS for recent tax debt, and you have just filed for Chapter 7 bankruptcy. You do not have any other “priority” debts, and the tax debt is your only nondischargeable debt. Why can this scenario benefit the debtor?

In short, since the tax debt owed to the IRS is a priority debt, the proceeds from the liquidation of the debtor’s estate will go toward paying the priority debt. This means that much (if not all) of the IRS tax debt may be paid as a priority debt, and remaining debts that are dischargeable—even if those creditors are not paid with proceeds from the state—can be discharged.

Learn More from a Chapter 7 Bankruptcy Lawyer in Tampa 

Do you have questions about IRS priority debt? An experienced Tampa bankruptcy attorney can answer your questions today. Contact Tampa Law Advocates, P.A. to learn more about how we can help with your case.

Resource:

law.cornell.edu/uscode/text/11/523