LEGAL GUIDE
Written by attorney Robert Jan Suhajda | Jan 31, 2011

Discharging Income Tax Interest and Penalties in Bankruptcy

  1. Prepetition interest is dis-chargeable if the underlying tax is dis-chargeable in both Chapter 7 and Chapter 13 cases. The Chapter 13 plan must provide for full payment of the prepetition interest if the underlying tax is not dis-chargeable.

  2. Postpetition interest in Chapter 7 is the responsibility of the debtor where the tax is non-dischargeable. In Chapter 13, no post-petition interest is allowed on a priority non-dischargeable tax unless it is secured.

  3. Prepetition penalties are dis-chargeable in Chapter 7 if the penalty relates to a dischargeable tax or it relates to an event that occurred 3 years before the petition was filed. Prepetition tax penalties are dischargeable in a Chapter 13 plan meaning they are treated as a general unsecured creditor except if they are for an actual pecuniary loss or the Trust Fund Penalty. Most tax penalties are puntive in nature and not for an actual pecuniary loss.

  4. Postpetition penalties are prevented by filing a Chapter 13 bankruptcy case.

Additional resources provided by the author

See Bankruptcy Code. Bankructcy Abuse Prevention and Consumer Protection Act of 2005.

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