Discharging a personal property tax during bankruptcy is like reading a flow chart with a number of “if this, then that” directions. The first question to ask is whether the personal property tax debt was an obligation which was assessed, or otherwise incurred, before the date of the bankruptcy filing. This is called a “pre-petition” tax debt and falls under the jurisdiction of the bankruptcy court. Tax obligations that arise after the filing of the bankruptcy case are generally outside the federal bankruptcy court’s jurisdiction, but taxes that arise during a bankruptcy case are treated as administrative claims. Confused? Read on!
The second question to answer is when the debt was incurred. Section §507(a)(8)(B) of the Bankruptcy Code grants priority status to a tax debt that is (1) a tax on property; (2) incurred prior to the commencement of the case; and (3) is last payable without penalty less than one year before the case filing. Priority tax debts are not discharged through Chapter 7 bankruptcy (see 11 U.S.C.§§523(a)(1) and 727(b)). A tax debt failing to meet these criteria is treated as a general unsecured claim (unless otherwise secured by operation of state law) as is generally dischargeable.
To illustrate this confusing Bankruptcy Code requirement, assume that the law of the state where a debtor resides states that personal property taxes are incurred on whatever taxable personal property the debtor owns on January 1 of each year. Also, assume that the debtor’s taxes are due on January 1 the following year and must be paid by January 31 or penalties are imposed.
Suppose our debtor files for Chapter 7 bankruptcy protection on January 30, 2013. Any personal property taxes owed for 2012 is obviously a priority debt and is not discharged. Additionally, any personal property tax owed for 2011 is not discharged, because the 2011 tax debt was (1) a tax on property; (2) incurred prior to the commencement of the bankruptcy case; and (3) last payable without penalty on January 31, 2012, less than one year before the case began. If the debtor had waited until February 1, 2013 to file his case, the 2011 property tax would be dischargeable.
Confused? You should be! Many experienced bankruptcy attorneys struggle with discharging tax debt. If you owe taxes to the state or federal government, discuss your situation with an experienced bankruptcy attorney. Your attorney will examine your situation and determine which of your tax debts are dischargeable and whether Chapter 7 or Chapter 13 of the Bankruptcy Code is more advantageous to your circumstances.