Bankruptcy isn’t the right solution for everyone, but when it comes to tax debt, Chapter 13 can offer some real advantages.

One of the biggest benefits is that it allows you to spread out your tax debt over the length of your repayment plan, typically 3 to 5 years. Instead of dealing with IRS collections or high-interest installment plans, you’re working through a structured plan that may reduce penalties and make payments more manageable.

Let’s take a closer look at how taxes are handled in Chapter 13.

Income Tax Debt in Chapter 13 - Priority vs. Nonpriority

Most income tax debt is considered priority debt, but not all of it.

Priority Tax Debt

Priority tax debt must be paid in full through your Chapter 13 plan.

This usually includes:

More recent tax debt
Taxes that don’t meet discharge requirements
Taxes that were assessed more recently by the IRS

While you still have to repay this debt, Chapter 13 can help by:

Spreading payments over time
Reducing or stopping penalties in some cases
Avoiding additional interest compared to IRS payment plans

Nonpriority Tax Debt

Nonpriority tax debt is treated differently.

This is typically older income tax debt that meets certain requirements. In Chapter 13:

It’s treated like general unsecured debt
You may only pay a portion of it
The remaining balance may be discharged after completing your plan

That means depending on your situation, you could pay significantly less than what you owe on older tax debt.

Because priority debt must be paid in full, it plays a major role in determining your monthly Chapter 13 payment.

How Does Chapter 13 Bankruptcy Affect Your Plan?

Your Chapter 13 repayment plan includes all of your debts—tax debt included.

Your monthly payment is based on:

Your income
Your expenses
The amount of priority debt (like recent taxes)
The amount of non-priority debt

Since priority tax debt must be paid in full, it can increase your monthly payment.

To get a better idea of what your plan could look like, you can use the Chapter 13 calculator below to estimate your monthly cost.

What Are the Criteria for Tax Debt to Be Nonpriority?

To determine whether income tax debt is priority or nonpriority, the IRS applies what’s known as the 3-2-240 rule.

The 3-2-240 Rule Explained

3 Years → The tax must have been due at least three years before filing
2 Years → The tax return must have been filed at least two years before filing
240 Days → The IRS must have assessed the tax at least 240 days before filing

If your tax debt meets all three conditions, it may be considered nonpriority—and potentially dischargeable.

If it does not meet these requirements, it will likely remain priority debt and must be paid in full through your plan.

Tax Liens – Secured Tax Debt

If the IRS has placed a lien on your property, the situation changes.

Tax liens create secured debt, which must be handled differently in Chapter 13.

The secured portion must be paid in full
The remaining balance may be treated as priority or nonpriority debt

For example, if you owe $50,000 in back taxes but only have $10,000 in assets, the portion tied to your assets may be treated as secured, while the rest depends on the 3-2-240 rule.

Other Types of Tax Debts

There are special rules for handling other types of tax debts in Chapter 13. Some tax debts may not be eligible for a discharge or may need to be paid in full regardless of when the tax debt became due.

Employee Payroll Taxes are not eligible for a bankruptcy discharge. Employers cannot discharge the payroll taxes they failed to withhold or withheld but did not pay.
Employer Payroll Taxes can be dischargeable in bankruptcy. These taxes are the employer’s portion of payroll tax.
Sales Taxes collected from customers but not paid to the government are not dischargeable in bankruptcy.
Tax Penalties on nondischargeable tax debt cannot be discharged.
Property Taxes are payable within one year of the bankruptcy filing.
Tax Refunds that a person received by mistake are not dischargeable.

There may be other taxes that you cannot discharge in bankruptcy. A bankruptcy lawyer can review your tax debts to determine how a Chapter 13 bankruptcy filing can benefit you.

Filing Chapter 13 Bankruptcy to Get Rid of Tax Debts

For some individuals, filing bankruptcy to get rid of tax debts is the most affordable way to handle tax debts. They may pay less through a Chapter 13 bankruptcy plan than if they entered an IRS Installment Plan or made an Offer in Compromise.

Tax debts are a complicated issue in bankruptcy cases. You must be careful to follow the bankruptcy rules for tax debt to ensure that you are eligible to discharge as much tax debt as allowed by law. Also, you need to ensure that you include all tax debts in your Chapter 13 plan. If you do not include the tax debt in your bankruptcy case, the debt survives the bankruptcy filing.

Understand Your Options to Eliminate Tax Debt

If you’re dealing with tax debt, you likely have more than one option.

At Ascend, we help individuals explore different debt relief solutions and understand what works best for their situation.

We can also help you connect with a bankruptcy attorney in your area who offers free consultations so you can get personalized guidance.

We encourage you to reach out to Ascend to speak with a representative free of charge. Call us at (833) 272-3631 or contact us online for more information about our free services.

How Are Taxes Handled in Chapter 13 Bankruptcy?