Bankruptcy Court Threatens Chapter 13 Repayment Plan Based on Failure to Set Aside Taxes

A Chapter 13 bankruptcy requires strict adherence to the terms set forth in the repayment schedule. Depending on the circumstances, a debtor might have additional obligations besides sending the ordered amount to the trustee every month. For example, courts sometimes require people with a history of tax problems to set aside money for post-petition obligations. Failure to do so could put the Chapter 13 proceeding in jeopardy, even for a debtor who has stuck to the repayment schedule. 

The 2025 U.S. Bankruptcy Court case In re Reardon addressed this type of scenario. Within their proposed Chapter 13 plan, Arthur and Jillayne Reardon of Maine agreed to set aside $3,500 per month for tax payments coming due following their filing. In its decision, the court noted that it had urged the Reardons to keep those funds in a separate escrow account, rather than mixing them with the funds used for general household expenses. 

Approximately one year later, in July 2025, the United States, on behalf of the Internal Revenue Service, filed a motion to dismiss the Reardons’ Chapter 13 case based on their failure to pay their 2024 federal income taxes. Moreover, the Reardons did not make required quarterly estimated tax payments for 2025. To confirm and maintain a Chapter 13 plan, debtors must demonstrate not only that they can fund plan payments, but also that they are addressing post-petition obligations as they come due Consequently, the IRS sought to convert the Chapter 13 proceeding into a Chapter 7 liquidation.  

Bankruptcy filers also have an obligation to act in good faith, and diverting monies that were supposed to be put aside to pay taxes also casts doubt on the debtors’ honesty. Given this issue and numerous others, the Reardons’ proposed repayment plan still was not confirmed 16 months after filing. Following the government’s motion, the court set a hearing in order to evaluate the claims of the IRS and other debtors. 

This case underscores an important lesson for Chapter 13 debtors: representations regarding the payment of post-petition taxes might not suffice. When filers have a record of nonpayment, they could be ordered to take concrete steps to prevent similar problems during their repayment schedule. When tax obligations are allowed to worsen during bankruptcy, courts may conclude that a Chapter 13 proceeding is no longer appropriate. Debtors should work with experienced counsel and immediately report of a circumstance that threatens their ability to make scheduled payments to the trustee or tax authority.   

Jeff Field & Associates provides comprehensive counsel to Georgia residents on a Chapter 13 repayment plans and other bankruptcy issues. For a consultation, please call 404-381-1278 or contact us online. Our offices are in Douglasville, Gainesville, Bogart, Lawrenceville, Marietta and Decatur.