The various bankruptcy laws have provided two options for tax bankruptcy. The first option is to file bankruptcy under chapter 7 where all the assets of the taxpayer will be liquidated or sold off. The second option is to file bankruptcy under chapter 13 allowing the taxpayers to continue with their business activities while paying off their debts on a specific repayment plan as suggested by the bankruptcy court. Following are some of the important things that you must be aware of regarding the tax bankruptcy before you file for bankruptcy.
Which Type Of Taxes Are Prepetition Eighth Priority Taxes?
If the following types of federal taxes are unsecured, they will be treated as prepetition eighth priority taxes as per the tax bankruptcy code.
•If you have not paid income taxes for the past few years, all the returns that are due until the year ending on or before the date of filing the bankruptcy petition will be treated as prepetition eighth priority taxes.
•If you are liable for any type of withholding taxes, such taxes will also be considered as prepetition eighth priority taxes.
•Income taxes assessed within 240 days before the date of filing the petition are also considered as prepetition eighth priority taxes.
Payment Of Eighth Priority Prepetition Taxes
•Under chapter 7 tax bankruptcy code, if there are assets remaining even after paying off the debts of secured creditors and other creditors with high priority status, the liquidation of the remaining assets can then be used to pay off the eighth priority prepetition taxes.
•Under chapter 11 tax bankruptcy code, the bankruptcy court can provide the debtor a maximum period of six months to pay off the eighth priority prepetition taxes including all the interests. The duration of six months starts from the day of judgment.
•Under chapter 12 tax bankruptcy code, the bankruptcy court allows the debtor to pay the eighth priority prepetition taxes in deferred cash payments over time.
•Under chapter 13 tax bankruptcy code, the bankruptcy court allows the debtor to pay the eighth priority prepetition taxes over three to five years.
Priority Status Of Various Types Of Taxes
Depending upon the type of the taxes, they are assigned a priority status. The taxes with higher priority have to be paid first. For example, those taxes that incurred during administration by the bankruptcy estate get higher priority status and the debtor is supposed to pay them first. As per the tax bankruptcy code, these taxes are also known as administrative expenses.
You should also note that as per the various tax bankruptcy laws, there are several conditions in which the debtor gets relief from various types of penalties.