Using Chapter 11 to Restructure Tax Debt
For many business owners, tax debt is not the result of poor planning but rather of income shortfalls, unexpected expenses, sudden economic downturns or other financial pressures that make it difficult to keep up. Chapter 11 can offer a path to tax relief, allowing a business to reorganize certain tax debts while continuing to operate and regaining financial stability.
Tax problems frequently arise when businesses experience cash-flow difficulties. Owners might fall behind on payroll tax deposits, accumulate sales tax obligations or incur income tax liabilities when their revenue declines. Once penalties and interest begin to accrue, the total amount of taxes owed can rapidly increase. Worse, state and federal taxing authorities have broad collection powers that can include liens, property seizures, garnishments and other enforcement methods.
One of the most important benefits of Chapter 11 is the automatic stay, which generally halts most collection efforts while the bankruptcy case is pending. This can provide business owners with immediate relief from collection pressure and allow them to stabilize their operations and develop a strategy that will allow restructuring.
A Chapter 11 plan can call for tax obligations to be repaid over an extended period of time. Certain priority tax claims generally must still be paid in full, but the ability to extend repayment for others over time can provide substantial relief. This can be valuable when a company’s cash flow cannot handle the tax liabilities. Businesses may also benefit from the reduction or elimination of certain penalties associated with unpaid taxes. In turn, that can increase the possibility of a successful reorganization.
However, various types of tax debt are treated differently under the Bankruptcy Code. Payroll tax liabilities, sales tax obligations and other unsecured tax claims may be subject to separate rules regarding priority, repayment and dischargeability. Because these distinctions can have an impact on the success of a reorganization, careful planning is essential before a bankruptcy petition is filed.
When used strategically, Chapter 11 can provide businesses with the time and structure they need to repay tax debt, reduce financial pressure and avoid disruptive state and federal collection actions. For companies struggling under their tax liabilities, a reorganization can give them a way to obtain long-term stability and keep their operations in place.
The Law Offices of Michael Jay Berger in Beverly Hills helps businesses throughout Southern California gain control over their tax debts. Schedule a free initial consultation by calling 310-271-6223 or contacting us online to learn how Chapter 11 can help your company.
