There are many complexities to filing Chapter 13 bankruptcies. People often think it’s just a matter of asking, “Do I qualify, and how do I file?”
Those are legitimate questions, but there are many other aspects that you should be aware of if you’re considering Chapter 13. Here are three that you may not have thought of, but should.
Did you know that Chapter 13 bankruptcy lasts five years, and during that time your credit is frozen? That’s right, taking on debt through credit is often the underlying problem, so Chapter 13 is structured to eliminate that basic issue. This does not mean that you’ll never be able to buy a house again, for example. But it does mean that you should not plan on doing so for five years.
Of course, if you’re considering Chapter 13 because your home is going into foreclosure, you shouldn’t be worrying about buying home. The immediate problem is saving the home you have.
Debt to the IRS is sometimes a major problem. People often face the difficult choice of paying for the basics — anything from rent to a car payment — and paying the federal government quarterly taxes. Unfortunately, that can lead to a cycle where quarterly taxes continually fall to the bottom of the priority list. Next thing you know, back taxes are a huge problem.
So the question is, then — does filing Chapter 13 protect against back taxes owed the IRS? Fortunately, the answer is yes — Chapter 13 applies to the IRS.
The IRS is essentially a debt collection agency that represents the federal government. When you file for bankruptcy, the IRS has to stop debt collection activities, including things like wage garnishments and levies.
The IRS may have already placed a lien against some of your assets. If so, the lien is valid. Beyond that the issue gets more complex. With the government, there’s what we call “priority debt” and “non-priority debt.” If the debt is priority, which usually refers to returns filed within three years, it has to be paid in full. If the debt is non-priority, which refers to debt on returns filed more than three years ago, that debt is probably non-priority and can be discharged.
One of the key things to keep in mind with a Chapter 13 repayment plan is that it must be adhered to — no excuses. Beyond that, there is some leeway. For example, the source of the income used to make a payment is not an issue (assuming it’s a legal source, of course). That means that there can be something called Contribution Income where, let’s say, parents contribute some income to an adult child. There are a lot of creative ways to make those payments in a legitimate way, but the bottom line is that whatever plan you propose, that payment has to be made.
As you can see, the details and conditions of a Chapter 13 bankruptcy can get very complicated very quickly. That’s why, if you’re wondering whether a bankruptcy might be a good way for you to rearrange your finances, give us a call. We can help.