Keep Running Your Business by Using Chapter 13 to Keep the IRS under Control

Is This You?

You are operating your own small business and are seriously behind on your taxes. Your business is in your own name or operates under an assumed business name (not a corporation, a limited liability company (LLC) or a formal partnership). So if your business directly owes any taxes—for payroll withholding, for example—you are personally liable on those taxes. You probably owe personal income taxes from the last year or two or more. You may well also be behind on the current year’s quarterly estimated income tax payments and/or your payroll withholding payments.

Your business is a decent one that brings in income, and has potential to do better. But you are under tremendous financial pressure by the IRS and/or your state tax agency. You are being required to make payments on your back taxes that you just can’t afford, while at the same time trying to keep up on the current year. And it’s just not working. You need relief from the relentless tax payment pressure so that you can focus on making your business successful.

A Possible Solution

Imagine a situation in which you could make more reasonable payments on the back taxes based on what you could really afford. Imagine if that payment amount took into account what you needed to pay on the current year’s quarterly taxes, to that you could afford to pay them as they became due. Imagine maybe would even writing off (“discharging”) some of the older taxes. And best of all, imagine all the while being protected from any collection action by the IRS and/or the state. These are among what Chapter 13 can do for you.

The Benefits of Chapter 13

Chapter 13 is formally called “Adjustment of Debts of an Individual with Regular Income.” A corporation cannot file under Chapter 13. But you and your business can file one together if that business is operated as a sole proprietorship. That means that it is operated in your own name, or in the name of you and your spouse, or by you under an assumed business name. Then you and business are treated as a single legal entity. So a single Chapter 13 case may be able to solve all your tax, and broader debt, problems.

Chapter 13 does this as follows:

1) Payments based on a reasonable budget: A lot of factors come into play to determine how much you pay each month, and how much you pay overall to your creditors, and to the IRS/state in particular. But primarily it’s based on your own budget. So your payments will likely be much more manageable.

2) Business and personal taxes and debts are dealt with together: Chapter 13 simultaneously covers your whole financial life, and accordingly re-prioritizes everything so that your tax debts don’t get in the way of you meeting your other important obligations. Often you can pay other obligations that are more important to you ahead of taxes—such as catching up on mortgage or vehicle loan or child support arrearage.

3) The “automatic stay” stops all creditor collections—including by tax creditors: Throughout the three-to-five-year length of a successful Chapter 13 case, the IRS and/or state can take no action against you on the debt(s) you owe them. This includes their inability to enforce prior tax liens or create new ones. This protection allows you to focus on your business, improve your income, and get back on financial track faster. (The exception is if you don’t do what you’re supposed to do and the court gives the IRS/state special permission to chase you after all.)

4) You may be able to discharge some tax debt: If one or more of your tax accounts are old enough and meet some specific conditions, you may pay nothing or very little on those. This could greatly reduce what you need to pay monthly and also during the whole Chapter 13 case.

5) You pay less even on those tax debts that can’t be discharged, by usually avoiding ongoing interest and penalties. This gets you out of tax debt and overall debt faster.

6) Keep necessary business and personal assets: If you don’t protect yourself with filing bankruptcy, and one of your creditors gets a judgment against you, it could try to seize your business or personal assets. Chapter 13 is specifically designed to let you keep the assets you need to keep operating your business.

7) Continue operating your business: If you filed a Chapter 7 “straight bankruptcy,” often you could not be allowed to continue operating your business. In contrast, Chapter 13 enables you to continue operating your business.

8) Keep important business and personal collateral: If you are behind either on business or personal loans secured by collateral, Chapter 13 will stop the repossession of the collateral. Then it will in some cases lower the monthly payments or at least give you time to catch up on your late payments. Overall, Chapter 13 provides ways to keep collateral that you would otherwise lose, and often do so under much better payment terms.

9) Numerous other benefits dealing with other debts: Beyond taxes, Chapter 13 comes with a whole tool kit of favorable ways to handle everything from child support arrears, vehicle loans, second mortgages, to even some student loans. Cumulatively, these and the tools addressing tax debts work together to enable you to re-take financial control.

10) A reasonable path to a very worthwhile goal: At the end of your successful Chapter 13 case, you would not owe a dime of taxes, and—other than any long-term debts you chose voluntarily to retain—you would be debt-free. 

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