Last time we discussed what types of taxes, even if you satisfy the time requirements of Title 11, that are not discharged in bankruptcy. This week I will discuss whether you need to file an adversary proceeding in your bankruptcy case to discharge tax debt. The short answer to this question is no, an adversary proceeding is not necessary to benefit from the discharge of eligible tax debt. However, like everything else in bankruptcy that is not the entire answer. Unlike student loan debts, which do require an adversary proceeding to attempt to discharge them, some tax debts, as discussed in prior parts of this series, are discharged by the Bankruptcy Code. As a consequence, as long as the tax debt satisfies Section 523, the tax debt is discharged. You are always permitted to file for judicial determination of the dischargeability of a debt under Bankruptcy Rule 7001(6). The core issue is do you have to?
As I said, you do not have to file an adversary, but you certainly can file one to benefit from a certain result. Without the order of the Court you are assuming that the taxing authority has made the identical review of your tax situation that you have and that the taxing authority has come to the same conclusion that you have. In a Chapter 13 case this is often very easy to determine. As part of the case the taxing authority will file a Proof of Claim. In that Proof of Claim the taxing authority will usually break up the debt into unsecured priority debt and general unsecured debt. In addition, the taxing authority will usually break that division down into the years at issue. You can see clearly what the taxing authority's evaluation is regarding your tax debt. If it is consistent with you review then you are all set and if it is not you can clearly see where the taxing authority is coming from and either discuss it with them or file an adversary.
In the Chapter 7 context it can be much harder because under most Chapter 7 cases the creditors will not file proofs of claim unless the Trustee has assets to distribute. As a result, you are left with two approaches to this issue, Hope that the taxing authority agrees with your assessment and that debt is discharged or Certainty through an expensive adversary process. Cleary the best option in these circumstances is to consult an experienced bankruptcy attorney. Your attorney and you will be able to discuss the benefits and drawbacks I have touched on here and find a solution that best fits your case. At the end of the day, most of these cases will resolve themselves without the need for an adversary proceeding. The key is to evaluate the issue prior to filing to maximize any dischargeable tax debt.
For additional information on this topic I would click here. Next week I will begin to discuss issues that come up in Chapter 13 Bankruptcy cases beginning with how agreements from places like Aaron's or Rent-A-Center are dealt with in a Chapter 13 Bankruptcy.