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A look at Chapter 11 Bankruptcy from the view of the IRS

On Behalf of | Jul 1, 2020 | Bankruptcy | 0 comments

Early in 2020 the IRS made a number of procedural changes to its manual on Chapter 11 Bankruptcy. A look at the material shows that many of the changes and additions to the manual consisted of editorial tweaks and clarifications.

Nonetheless, the reorganization of pertinent areas of Chapter 11 Bankruptcy offer a chance to revisit important elements of this procedure.

The purpose of a Chapter 11 Bankruptcy

This section of the Internal Revenue Manual, Part 5, Chapter 17, Section 10, offers some clear background on Chapter 11 Bankruptcy. It states this type of bankruptcy is a rehabilitative case that gives the debtor a breathing period during which time the entity can reorganize business affairs and put together a strategy to pay creditors. Many legal professionals refer to a Chapter 11 as the reorganization bankruptcy. It is possible, though, for a creditor to liquidate instead of reorganize. Creditors must keep track of their payments under the terms of a confirmed plan. This portion of the U.S. Bankruptcy Code typically appeals more to businesses than to individuals.

The discharge of debts

According to the IRS, a Chapter 11 plan, once effective, often allows for a discharge of some portion of the debtor’s debts. This includes debts owed as taxes to the IRS. In fact, the IRS does not receive any preferential treatment as a creditor in a Chapter 11 case. The provisions of a confirmed plan generally bind all involved parties. This happens whether or not the creditor agreed with the plan or not. The IRS can however raise concerns about any aspects of the proposed plan it deems to contain inappropriate provisions. A confirmed plan only allows for the collection of debts as outlined in the plan.