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Bankruptcy on IRS Debt

Can You File Bankruptcy On IRS Debt?

Filing for bankruptcy is often seen as a last resort for individuals facing insurmountable debt. While many types of debts can potentially be discharged through bankruptcy, the inclusion of IRS tax debt deserves special attention. Indeed, various nuances and legal stipulations apply when considering bankruptcy as a means to manage IRS obligations. Unlike credit card debt or personal loans, tax liabilities are subject to distinct rules.

Types of Bankruptcy: Chapter 7 and Chapter 13

Understanding the types of bankruptcy is crucial before delving into IRS debt specifics. The two main bankruptcy types for individuals are Chapter 7 and Chapter 13:

Chapter 7 Bankruptcy

  • Liquidation Bankruptcy: Chapter 7 is often referred to as liquidation bankruptcy. It involves the sale of non-exempt assets to pay off creditors.
  • Eligibility Criteria: A means test determines eligibility, assessing income. If the income exceeds a state-median level, Chapter 7 might not be an option.
  • Discharge Timeline: Typically, the court grants a discharge within four to six months after filing.

Chapter 13 Bankruptcy

  • Repayment Plan: Chapter 13 involves a court-approved repayment plan that usually lasts three to five years.
  • Eligibility Criteria: Only available to those with a regular income. Debt limits also apply.
  • Protection from Foreclosure: Offers an avenue for debtors to avoid losing their homes to foreclosure by catching up on past-due mortgage payments.

Both types can address tax debt, but each has distinct mechanisms and requirements for dealing with IRS obligations.

Criteria for Discharging IRS Debt

Not all tax debts are dischargeable through bankruptcy. The primary criteria include:

  1. Filing Date: The tax return for the debt in question must have been filed at least two years before the bankruptcy filing.

  2. Due Date: The tax debt must be at least three years old. Specifically, the tax return was due at least three years before you filed for bankruptcy.

  3. Assessment Date: The IRS must have assessed the tax at least 240 days before the bankruptcy filing. Known as the 240-Day Rule, this ensures a certain timeline of IRS involvement before a debtor seeks relief.

  4. No Fraud: The tax return must not be fraudulent or involved in tax evasion strategies.

  5. Proper Reporting: The taxpayer must have filed a tax return for the relevant debt.

Meeting these criteria doesn't guarantee discharge. Each case is unique and subject to court scrutiny.

How Bankruptcy Affects IRS Debt

Bankruptcy does not automatically eliminate IRS debt; rather, it reorganizes it in several ways:

Chapter 7 and IRS Debt

If the criteria are met, a Chapter 7 bankruptcy might discharge IRS debts. Ineligible debts (like those resulting from fraudulent returns) remain post-bankruptcy. Become well-versed with your state’s exemptions, as they'll determine which of your assets might be liquidated.

Chapter 13 and IRS Debt

For Chapter 13, IRS debt becomes part of the repayment plan. Priority debts, such as recent tax debts, must be paid in full during the plan. Older tax debts classified as non-priority might receive reduced payments. It provides a structure but requires a steady income for compliance.

Additional Considerations

Several other considerations warrant attention when considering bankruptcy for IRS debt:

  • Liens: An IRS lien can complicate property sales. Filing for bankruptcy can limit the IRS’s ability to enforce a lien but doesn’t eradicate it. If assets tied to a lien exist, consult legal advice to understand asset protection nuances under bankruptcy.

  • State Tax Debt: Some bankruptcy considerations also apply to state tax debts, so understand both Federal and State implications.

  • Post-Bankruptcy Obligations: Adhering to post-bankruptcy requirements is crucial, such as maintaining current tax filing and payment duties.

  • Professional Consultation: Always seek professional advice from a bankruptcy attorney or tax advisor. They can provide tailored guidance based on specific circumstances.

Common Misconceptions About Bankruptcy and IRS Debt

Misunderstandings abound when it comes to discharging IRS debt through bankruptcy. Here are a few:

  • All Tax Debts Are Dischargeable: Not true. Only those meeting strict criteria qualify.

  • Bankruptcy Erases All Financial Obligations: Bankruptcy doesn’t discharge all types of debt, like child support or student loans. Similarly, not all tax debts are dischargeable.

  • The IRS Won’t Oppose: The IRS actively ensures tax debts are properly addressed in bankruptcy cases and may contest a discharge if criteria aren’t met.

FAQs

1. Can bankruptcy stop IRS wage garnishments?

Yes. Upon filing for bankruptcy, an automatic stay goes into effect, halting most collection activities, including wage garnishments.

2. Will bankruptcy remove an IRS tax lien?

Filing can restrict enforcement of a lien but doesn’t eliminate it. An IRS lien on assets persists beyond bankruptcy, impacting future financial activities such as selling the property.

3. Can I negotiate with the IRS outside of bankruptcy?

Absolutely. Options include installment agreements or offers in compromise. Bankruptcy is a tool among many for mitigating tax burdens.

4. How long does a bankruptcy stay on my credit report?

A Chapter 7 bankruptcy remains on credit reports for ten years, while Chapter 13 usually stays for seven years.

5. Is it expensive to file for bankruptcy?

Filing can be costly, involving lawyer fees and court costs. Balance these expenses against potential debt relief benefits.

Conclusion

Filing bankruptcy on IRS debt is a viable strategy under specific conditions. Understanding the intricacies, requirements, and broader implications of Chapter 7 and Chapter 13 bankruptcies is essential. Bankruptcy may reframe your financial landscape, offering relief and fresh perspectives. Thoroughly examining all options, consulting with financial and legal professionals, and grasping potential outcomes remains the prudent path forward.

Explore related content on our website to gain deeper insight into debt management strategies and navigate your financial challenges with informed confidence.