Uncle Sam, of the U.S. Treasury, is a pesky and persistent “family member” who inserts himself into every conceivable financial affair. Impossible to shake, his needs must be satisfied. If not, he can make life extremely difficult. Understanding tax treatment in Chapter 11 Bankruptcy is critical because of the stringent tax debt payback requirements imposed by Uncle Sam.
Why Is Tax Treatment Important in Chapter 11 Bankruptcy?
More often than not, persons (individuals, partnerships, and corporations) who are considering Chapter 11 bankruptcy relief have significant issues with Uncle Sam. Tax obligations are typically the most tempting not to pay because neglecting to do so usually does not result in immediate shutdown of business operations, unlike non-payment of trade debt where creditors can disrupt or bring a screeching halt to business affairs. Those contemplating Chapter 11 must understand how tax debt is treated in the bankruptcy case because failing to account for this debt treatment could derail the entire reorganization effort before it even gets a solid footing on the track.
Understanding the repayment rules for priority tax creditors is therefore critical before plunging into a Chapter 11 bankruptcy. Reorganization of debt through Chapter 11 is ultimately not feasible for many would-be-filers because they cannot satisfy through adequate cash-flow these stringent payback requirements.
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