One of the few areas of debt many consumers are confused about is IRS taxes. In most cases, it is a case by case basis, depending what years are owed, when the return was filed and what type of tax is owed. It is not really complicated, so we suggest you speak with Patrick L. Cordero, Esq., to learn more your options Below is a simple explanation of tax debt and bankruptcy
Filing for Chapter 7 or Chapter 13 Bankruptcy may Wipeout (aka “discharge”) certain forms of tax debt granted the debts meet certain criteria. Aside from the “clean slate” option, bankruptcy can also give you the ability to reduce your overall tax debt as well as increase the amount of time you’re allowed to pay it back.
How Filing for Bankruptcy Can Stop The IRS
Immediately upon filing for bankruptcy what happens is that your creditors (i.e. those to whom you owe money) are given notice that they must cease trying to collect money from you. This is called an “automatic stay.” In other words, all collection, all collection calls, and collection procedures (such as Garnishments) stop immediately This “stay” remains In place throughout the course of the bankruptcy case and can only be lifted via a special creditor request or of course, when the case has completed. Also, note that automatic stays only go into effect the first time you file for bankruptcy. If you’ve done so on more than one occasion creditors are usually allowed to continue pursuing you over the course of your bankruptcy proceedings if they so desire.
Which Tax Debts Can You Discharge
You can discharge/wipe out your federal income tax via filing for bankruptcy but there are guidelines, some which are listed below. In Chapter 13 you can also discharge the debt, and if you must pay them, Chapter 13 gives you the right to pay it in a payment plan:
- The taxes are income taxes other than income, such as payroll taxes or fraud penalties, can never be eliminated in bankruptcy.
- You did not commit fraud or willful evasion. If you filed a fraudulent tax return or otherwise willfully attempted to evade paying taxes, such as using a false Social Security number on your tax return, bankruptcy can’t help.
- The debt is at least three years old Only tax debts that are 3 years old or older can be eliminated by a bankruptcy filing.
- You filed a tax return. You must have filed a tax return for the debt you wish to discharge at least two years before filing for bankruptcy.
- You must have your income tax debt assessed by the IRS at least 240 days prior to your bankruptcy filing. That or it must not have been assessed at all.
Federal Tax Lien
If you successfully qualify under Bankruptcy to discharge your taxes it may be bittersweet because it means you may not wipe out prior recorded tax liens. A bankruptcy may Wipe out your personal obligation to pay the debt and prevent the IRS from going after your bank account or wages. If your property has already had a tax lien levied against It by the IRS, the lien will remain on the property. In this case, you’d need to sell the property to pay off the taxes.
What About Non-Dischargeable Tax Debts?
Under Chapter 7 and 13 Bankruptcy Income taxes are treated differently.
- Chapter 7 Bankruptcy: Except for the automatic stay, bankruptcy cases don’t have much effect on tax debts that can’t be discharged. Once a discharge has been issued a court clerk will issue the discharge (A case might remain open if the court-appointed trustee has to gather and sell the debtor’s nonexempt property) If the bankruptcy case doesn’t discharge the IRS tax debt, the IRS will be free to resume collection actions.
- Chapter 13 Bankruptcy: If you have non-dischargeable IRS debt, you can use a Chapter 13 payment plan to manage it You’ll propose a plan to pay your IRS debt (along with your other debts) over a three- to five-year period.
If you need help filing for bankruptcy call the Law Offices of Patrick L. Cordero today at (305) 445-4855 for a free, no-obligation, consultation.