Bankruptcy primarily serves to provide a fresh start by discharging certain debts, giving people the opportunity to rebuild their financial lives. However, not all debts qualify for discharge. Tax debts have specific rules that dictate whether they can be eliminated through bankruptcy proceedings. The type of bankruptcy filed—Chapter 7 or Chapter 13—also influences the treatment of tax debts.
Discharging Tax Debts in Chapter 7 Bankruptcy
Chapter 7 bankruptcy allows people to eliminate many unsecured debts quickly, but tax debts face unique restrictions.
Discharge tax debts under Chapter 7 is possible if the following conditions are met:
- The tax must be income tax: Only income tax debts qualify for discharge. Other types of tax debts, such as payroll taxes or fraud penalties, do not qualify.
- Filing requirements: The taxpayer must have filed a tax return for the debt at least two years before filing for bankruptcy. This requirement includes ensuring that the return was filed on time, or at least within the allowed extension period.
- Debt assessment timing: The tax assessment must have occurred at least 240 days before filing for bankruptcy. This waiting period ensures that the tax obligation has existed long enough to qualify for discharge.
- Legitimacy of the tax: The tax must not be subject to fraud or evasion. If the IRS deems the tax debt fraudulent, the court will likely deny the discharge.
If all these conditions are satisfied, people can potentially discharge their income tax debts through Chapter 7 bankruptcy.
Dealing with Tax Debt in Chapter 13 Bankruptcy
Chapter 13 bankruptcy functions differently from Chapter 7, focusing on repayment over a specified period. This option allows people to keep their assets while paying off debts, including tax debts.
The treatment of tax debts in Chapter 13 includes several key points:
- Payment plan: Under Chapter 13, people can propose a repayment plan to the court. This plan must prioritize secured debts and can include tax debts. The plan can span three to five years, during which the debtor makes monthly payments.
- Tax priority: Tax debts classified as priority debts must be repaid in full during the Chapter 13 repayment period. Priority debts include recent income taxes and certain property taxes. However, older tax debts that meet the discharge criteria can be treated like unsecured debts, allowing for partial repayment or discharge.
- Avoiding penalties and interest: Filing for Chapter 13 can halt collection actions from the IRS or state tax authorities, preventing further penalties and interest from accruing during the repayment period. This protection offers significant relief and helps manage tax obligations more effectively.
While debt may not be directly discharged in Chapter 13, a structured repayment plan can make paying back taxes more realistic.
Contact Us for Legal Assistance
For many, filing for bankruptcy represents a crucial step towards financial recovery. Consulting a bankruptcy attorney like ours at Arnold Law Group, APC can clarify individual circumstances and assist in navigating the complex landscape of tax debts and bankruptcy.
By taking informed steps, you can reclaim control over their financial futures and work toward a more stable financial situation.
Contact us today if you wish to explore your debt relief options with bankruptcy.