Tax Arrears in Individual Rehabilitation: Eligibility and Repayment
- 1. Filing and Repayment with Outstanding Taxes
- 2. Repayment Amounts and Periods in Relation to Tax Debt
- 3. Stays of Tax Collection and Release of Attachment
- 4. Documents and Preparation Before Filing
- 5. Frequently Asked Questions (FAQ)
- Q. Must I pay all outstanding taxes before I can apply?
- Q. Can I leave taxes out of the list of creditors?
- Q. Does a discharge order also clear my tax debts?
- 6. Key Points and Precautions
Can I apply for individual rehabilitation if I am behind on both loan repayments and taxes?
When considering tax arrears in individual rehabilitation, eligibility to apply and the method of repaying taxes must be examined separately.
Even if you meet the filing requirements, assuming that taxes can be partially repaid and the balance discharged like ordinary loans may lead to expectations that do not match the actual repayment plan.
Bit-off explains the filing requirements, treatment of taxes, and points to consider when responding to attachment.
1. Filing and Repayment with Outstanding Taxes
Tax arrears do not, by themselves, prohibit an application for individual rehabilitation.
You must meet the filing requirements, including the prospect of ongoing, recurring income, inability to pay debts or the likelihood of that inability, and the statutory debt limits.
Debtor Rehabilitation and Bankruptcy Act, Article 579
Taxes are treated according to the legal nature of the claim.
National and local taxes are subject to statutory collection-priority rules. Article 611(1)(2) of the Debtor Rehabilitation and Bankruptcy Act requires the plan to provide for full repayment of individual rehabilitation estate claims and individual rehabilitation claims with general priority.
Framework Act on National Taxes, Article 35
Framework Act on Local Taxes, Article 71
Debtor Rehabilitation and Bankruptcy Act, Article 611
| Category | Treatment | Points to Check |
|---|---|---|
| Unpaid national and local taxes arising from a cause predating commencement | Full repayment if the claim qualifies for general priority | Tax type, underlying cause, and payment deadline |
| Statutorily specified taxes, such as value-added tax and withholding tax, whose payment deadlines have not yet passed at commencement | Individual rehabilitation estate claims under Article 583 | Applicable tax type and payment deadline |
| Ordinary claims, such as loans and credit card balances | Depending on the requirements, the remaining debt may be discharged after partial repayment | Whether the claim is secured and whether a discharge exclusion applies |
Even value-added tax may be classified differently depending on whether its payment deadline had passed when the proceedings commenced.
This is why checking only the total amount of tax arrears is insufficient when considering individual rehabilitation.
Debtor Rehabilitation and Bankruptcy Act, Article 583
2. Repayment Amounts and Periods in Relation to Tax Debt
In individual rehabilitation cases involving tax arrears, the ability to cover taxes that must be paid with priority is important.
Not all monthly income is treated as available for repayments. Disposable income must be assessed after taking into account taxes, living expenses, necessary business expenses, and other items specified by law.
Debtor Rehabilitation and Bankruptcy Act, Article 579
For example, monthly payments of KRW 700,000 over 36 months total KRW 25.2 million.
If taxes requiring full repayment alone amount to KRW 30 million, those terms would be insufficient. Other priority claims, costs, and the repayment requirements for ordinary claims must also be considered.
The repayment period is, in principle, no more than three years. Special circumstances may justify a period of up to five years, but a large tax debt does not automatically result in an extension.
The Supreme Court has also held that priority claims do not necessarily have to be repaid within the first half of the overall repayment period.
However, the 60-month repayment period in that case must be distinguished from the current rules on repayment periods.
Debtor Rehabilitation and Bankruptcy Act, Article 611
Supreme Court Decision of February 17, 2017, Case No. 2016Ma1324
3. Stays of Tax Collection and Release of Attachment
If a bank account has been attached for tax arrears, filing an individual rehabilitation application alone does not release the attachment.
Before commencement, the court may order a stay or prohibition of tax delinquency collection proceedings if it considers this necessary. In doing so, it must hear the views of the authority entitled to collect the tax.
Debtor Rehabilitation and Bankruptcy Act, Article 593
After an order commencing proceedings, tax delinquency collection proceedings and other specified measures based on claims included in the list of creditors are stayed or prohibited.
However, a stay, which halts the progress of proceedings, differs from release, which removes the attachment itself.
Do not assume that attachment for tax arrears is automatically released by applying, without distinction, the provisions under which ordinary compulsory execution and certain other measures lose effect upon approval of the repayment plan.
Debtor Rehabilitation and Bankruptcy Act, Article 600
Debtor Rehabilitation and Bankruptcy Act, Article 615
Review the attachment notice and court orders, and check the stage of collection and the requirements for release with the department responsible for collection.
4. Documents and Preparation Before Filing
When preparing for individual rehabilitation involving tax arrears, check the arrears for each tax type and cross-check tax notices, payment deadlines, and amounts paid.
If additional taxes or similar charges are included, identify the amount and legal nature of each item separately.
Next, calculate the amount you can afford to pay using payslips or revenue and expense records, lease agreements, and documents concerning dependents.
You should also organize information on the assets under attachment and the current stage of proceedings and reflect it in the list of creditors and repayment plan.
The court examines the repayment plan's legality, fairness, equity, feasibility, and other relevant matters.
Rather than cutting living expenses excessively to make the figures fit, prepare a plan that you can consistently perform.
Debtor Rehabilitation and Bankruptcy Act, Article 614
5. Frequently Asked Questions (FAQ)
Q. Must I pay all outstanding taxes before I can apply?
No.
You need to assess whether you meet the filing requirements and can prepare a plan that provides for full repayment of the relevant taxes and satisfies the other applicable requirements.
Q. Can I leave taxes out of the list of creditors?
You must not exclude them at your own discretion.
Claims omitted from the list are excluded from discharge. If you discover an omission, consider the procedure for correcting it.
Q. Does a discharge order also clear my tax debts?
You should not assume that taxes are automatically discharged.
Taxes with priority must be repaid in full, and Article 625 expressly excludes taxes falling under Article 583(1)(2) from discharge.
6. Key Points and Precautions
Addressing tax arrears in individual rehabilitation begins with distinguishing eligibility to apply from the obligation to repay taxes.
The key considerations are the tax type, payment deadline, priority, and disposable income.
Obtain records of tax arrears, income, and expenses. If assets have been attached, distinguish a stay from release of attachment when deciding how to respond.
To this end, Bit-off examines tax notices and arrears records, together with income, asset, and attachment documents, to determine the classification of claims and the feasibility of the repayment plan.
Based on those findings, Bit-off assists with preparing documents, including the list of creditors and draft repayment plan, responding to requests for corrections or supplementation, and reviewing procedures relating to tax delinquency collection.
You can obtain advice on the specific procedures based on the documents you have.
