Chapter 13 is usually a much better tool than Chapter 7 for tackling priority debts.
In my blog on Tuesday, April 17, I showed how Chapter 7 CAN be a good tool to pay off or pay down your priority debts—which are mostly back child/spousal support payments and taxes. BUT it takes an unusual situation to have that work well. You need to have an asset that you are willing to surrender to the trustee. Plus that asset needs to be worth enough so that when the trustee sells it there is enough to pay off your priority debts, after paying the trustee any costs of sale (like a broker’s commission or any advertizing) plus the trustee’s fee.
Most of the time you don’t have an asset that you don’t need and which is worth enough for the Chapter 7 trustee to pay off your priority debt. That’s where Chapter 13 comes in. And it comes with huge advantages over trying to pay those taxes or back support on your own.
1. Protection from the priority creditors
Both taxing authorities and state support agencies have extraordinary powers over you in collecting their debts. The can often seize your assets, garnish your wages, bank accounts, and business receivables without additional court proceedings, and suspend your driving and occupational licenses. Some of these aggressive collection methods can even continue when you file a Chapter 7 case. In contrast, Chapter 13 stops virtually all of these collection methods by priority creditors, as long as your Plan meets certain conditions and you comply with its terms.
2. Freeze interest and penalties
In most situations, interest and penalties on priority debt are stopped during the time that you are in Chapter 13. They are then legally discharged when you successfully complete your case. There are some exceptions. But if you have substantial income tax debt, this feature of Chapter 13 can save you many thousands of dollars.
3. A more reasonable budget
Compared to the extremely tight budget the IRS and other taxing authorities put you in if you are paying priority debt on your own, the Chapter 13 budget is usually much more reasonable. Chapter 13s are designed to have you succeed.
4. Allows you to favor the priority debt over less important ones
In most situations you can and must pay your priority debt before and often instead of your “general unsecured creditors.” So you are able to concentrate your efforts on paying off the debts that are in your best interest to pay anyway.
Chapter 13 protects you from these very powerful and often aggressive creditors, and gives you time and a reasonable budget with which to pay them. Because there’s usually no new interest and penalties piling on, and you can focus on paying these priority creditors instead of other creditors, you can more likely and quickly become debt-free.