Taxes and unsecured debt are two distinct types of financial obligations. Governments impose taxes under the authority of law, while debt obligations often arise from commercial or consumer activities. The differing nature of taxes and unsecured debt affect how these obligations are enforced and handled in bankruptcy. In terms of collection, tax claims receive preferential treatment over unsecured debt.
A tax is an involuntary obligation. The federal government and state and local governments impose tax obligations upon individuals, organizations or their property to pay for public services and infrastructure. Governments assess income, property and sales taxes. Debt typically refers to an obligation to pay for products or services received, or to repay a loan. An unsecured debt is not backed by collateral. Credit cards and bills from hospitals, doctors, lawyers and other providers of goods and sellers constitute the most common forms of unsecured debt.
Governments may collect unpaid taxes by seizing vehicles and other personal property; filing a claim, or lien, against land and buildings; and garnishing a portion of salary or wages. Tax collectors can use these methods without filing a lawsuit. For an unsecured debt, the creditor must file a lawsuit and obtain a judgment that the debtor owes the debt. Once the creditor receives judgment, the debtor can request that certain property be exempt from being used to pay the judgment. The creditor can use the debtor's non-exempt property to pay on the judgment.
Discharge in Bankruptcy
Bankruptcy frees debtors from certain obligations. Debtors must still pay property taxes incurred within one year of a bankruptcy filing, income taxes, and excise taxes, since these are not discharged by bankruptcy. Bankruptcy extinguishes most unsecured debt, unless the debtor intentionally lied on an application or other writing to obtain the loan, services, products or credit. Other non-discharged unsecured debt includes student loans, child support and alimony.
In this case, "priority" refers to the order of paying unsecured claims in bankruptcy -- including tax claims not secured by a lien -- when a debtor lacks enough property to pay all unsecured claims. Tax claims get paid before credit card companies, service providers and other holders of unsecured debt.
- Law Justicia: Cases: In re Karen Lee Camille: 94 F.3d 1330 (9th Cir. 1996)
- Federal Trade Commission: Facts for Consumers: Knee Deep in Debt
- Arizona Department of Revenue: Brochure: Collections Process
- Internal Revenue Service; Publication 594: The IRS Collection Process
- Cornell University Law School: Legal Information Institute: 11 U.S.C. Section 523: Exceptions to Discharge
- Cornell University Law School: Legal Information Institute: 11 U.S.C. Section 507: Priorities
- United States Courts: Federal Courts: Bankruptcy: Bankruptcy Basics: Glossary
- Internal Revenue Service: The Truth About Frivolous Tax Arguments: Section I
- State of Colorado: Department of Law: Collection Agency Board: Tax Liabilities as Debt; May 11, 1988
- University of Minnesota: Extension: Business Management: Rights of Unsecured Creditors
- United States Department of Justice: Tax Division: About Us
- California State Board of Equalization: Publication 54: Tax Collection Procedures
- United States Courts: Bankruptcy: Bankruptcy Basics: Discharge in Bankruptcy
Christopher Raines enjoys sharing his knowledge of business, financial matters and the law. He earned his business administration and law degrees from the University of North Carolina at Chapel Hill. As a lawyer since August 1996, Raines has handled cases involving business, consumer and other areas of the law.