Wait, Wait, Don’t File

Wait to file Chapter 13Three weeks til the New Year and I’m starting to look at each Chapter 13 filing in my shop and ask whether we should file this case.

It’s not that the calendar has much influence on whether clients need a bankruptcy.  It’s “Will these folks owe taxes for 2011?

For the case I reviewed yesterday, the clients expect to owe $11,000 in income taxes for 2011.  If we file this week, as the client is pushing for, that tax obligation is a post petition tax.

Remember, the taxes are owed after the close of the tax year.  Payment is due no later than April 15th, but the liability arises January 1.

If we wait to file, not only can I use the 2011 tax debt in the means test, I can stretch out the payment of those taxes over 5 years of the plan, without interest.  And it avoids one of the most vexing post petition challenges:  a Chapter 13 debtor who is not staying current with post filing taxes.

The Bankruptcy Code does provide for treatment of post petition debt through the plan, but my experience is that the taxing authorities are reluctant at best, and adamantly opposed, at worst, to handling post petition taxes under  §1305.

Close of the tax year on December 31 is less often meaningful in Chapter 7.  The tax for the current year isn’t dischargeable.  It’s only an issue if the case may have assets.  If so, I want those assets my client is giving up in the Chapter 7 to go, to the extent possible, to pay non dischargeable debts that my client will otherwise have to pay from post filing assets.

For an asset Chapter 7, the debtor can elect a short tax year at any point in the calendar year when the bankruptcy case is filed.  Because the filing of a Chapter 13 doesn’t create a separate taxable entity, a short year election is not available in Chapter 13.

So, if it appears that the client will have a significant tax liability for this year, resist the urge to clear your desk and your office of cases to be filed before year’s end and wait til 2012, to catch the taxes in the Chapter 13.

Image courtesy of  campbelj45ca

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  • Great article! Do I assume correctly that you mean taxes owed after withholding? So if a Chapter 13 filer has had almost all of the 2011 tax withheld, then there is nothing “owed” on January 1, 2012?

    • Cathy

      You’re right that I’m looking at taxes for which insufficient money has been prepaid.  If withholding and/or quarterlies are adequate, there is no issue.

  • Mitch

    I haven’t had the problem of the IRS not filing a post-petition tax claim. Most of the time, if I ask, they will sign it.