Tax Debt and Bankruptcy

Question: Can Tax Debt Be Discharged In Bankruptcy?

Understanding the relationship between tax debt and bankruptcy is crucial for individuals facing overwhelming tax liabilities. This guide will explore whether tax debt can be discharged in bankruptcy, providing you with in-depth insights into the types of bankruptcy, conditions for tax debt discharge, and important considerations to remember.

Understanding Bankruptcy Types

1. Chapter 7 Bankruptcy

Chapter 7 bankruptcy, also known as "liquidation bankruptcy," involves the sale of a debtor’s non-exempt assets. The proceeds are then distributed to creditors. It's a preferred choice for many individuals as it can eliminate most unsecured debts, providing a fresh financial start.

2. Chapter 13 Bankruptcy

Unlike Chapter 7, Chapter 13 bankruptcy involves a reorganization plan where the debtor retains their assets. Instead, they create a repayment plan to pay back creditors over a period, typically three to five years. This option is beneficial for those with a regular income who need to catch up on secured debt payments.

Can Tax Debt Be Discharged?

Yes, tax debt can be discharged in bankruptcy, but it's subject to strict conditions. Not all tax debts qualify for discharge. Let's delve into what you need to consider:

Key Conditions for Discharging Tax Debt

1. Age of the Tax Debt

   • Tax debts must be at least three years old before they can be considered for discharge.
   • The tax return for that debt must have been filed at least two years prior to declaring bankruptcy.

2. No Recent Tax Evasion

   • The taxpayer should not be guilty of any fraudulent activities or evasions related to taxes.

3. Assessment of Tax Debt

   • The IRS must have assessed the tax debt at least 240 days before the bankruptcy filing.

4. Priority of the Tax Debt

   • The debt must be classified as unsecured and non-priority. Priority debts include recent income taxes, penalties, and some types of assessed taxes.

Detailed Table: Conditions for Discharging Tax Debt

Steps to Discharge Tax Debt

1. Consult a Bankruptcy Attorney

   • Always start by seeking professional legal advice. This field is intricate, and an experienced attorney can provide personalized guidance.

2. File the Correct Bankruptcy Chapter

   • Choose between Chapter 7 or Chapter 13 based on your financial situation and objectives. Your attorney can help you decide the best path.

3. Ensure Compliance with All Conditions

   • Verify that your tax debt complies with the necessary age, return filing, and assessment conditions.

4. Submit Proper Documentation

   • Ensure all required documents, including tax returns and financial statements, are accurately prepared and submitted.

5. Participate in Credit Counseling

   • Complete the required credit counseling from an approved agency before filing for bankruptcy. This step is mandatory.

Common Misconceptions About Tax Debt and Bankruptcy

Misconception 1: All Tax Debts are Dischargeable

Not all tax debts qualify for discharge. Recent years' taxes, payroll taxes, and fraud-related liabilities often remain beyond the discharge's reach.

Misconception 2: Bankruptcy Erases All Financial Obligations

While bankruptcy can alleviate certain debts, you may still be responsible for other obligations, such as student loans, child support, and court-ordered fines in addition to particular tax debts.

Misconception 3: Discharged Debts Can't Be Practically Retrievable

Dischargeable tax debts are often retrieved in Chapter 13 bankruptcy through the repayment plan, although not in full amounts.

Important Considerations

Impact on Credit Score

Filing for bankruptcy significantly affects your credit score. This impact might remain for up to 10 years. Consider this factor when choosing bankruptcy as an option for discharging tax debt.

Non-Dischargeable Taxes

Be aware that certain taxes, like trust fund taxes and certain excise taxes, are typically non-dischargeable.

Retaining Professional Guidance

Throughout the bankruptcy process, continuous professional guidance from a certified attorney is crucial to navigate the complexities of the legal system.

FAQs

Q1: Can I discharge tax debts in both Chapter 7 and Chapter 13 bankruptcy?
Yes, you can discharge tax debts in both types of bankruptcy, but they are more common in Chapter 7. Chapter 13 focuses on reorganization, where paying back a portion of the tax debt is more likely.

Q2: How does filing for bankruptcy affect my property?
In Chapter 7, there's a risk of losing non-exempt property, which could be sold to pay creditors. However, Chapter 13 lets you retain your assets while following a repayment plan.

Q3: If my tax debt is deem unsecured, can I stop paying it during bankruptcy?
While bankruptcy can eliminate certain unsecured tax debts, specific payments might still be required until the debt is confirmed as dischargeable through the bankruptcy process.

Conclusion

Deciding to embark on the bankruptcy path requires an understanding of which tax debts might be dischargeable. While bankruptcy can offer substantial relief by potentially eliminating overdue tax liabilities, navigating through its complexities requires careful consideration and professional guidance. Always consider consulting with a bankruptcy attorney to thoroughly evaluate your unique financial circumstances before making a decision. To explore more related content and enhance your knowledge, continue reading through our website.