Getting behind on income tax payments is not a good thing. But, it’s not a shameful thing either.
You may have to file a bankruptcy for several reasons. Though a negative connotation is always attached to the word ‘bankruptcy’, yet it can help you give a fresh start to your financial life.
When you are filing bankruptcy, you would like to get a discharge from all your debts, irrespective of whether it’s a Chapter 7 or a Chapter 13.
Let us find out whether or not you can get tax debt relief by filing a bankruptcy.
Are tax debts discharged in a Chapter 7 bankruptcy?
Chapter 7 bankruptcy is probably the best option to get a discharge from debts fast, and tax debt is not an exception.
However, you will only get a discharge from your tax debts if you fulfill the eligibility criteria. They are as follows:
It is an income tax debt, not payroll taxes or any fraud penalty. You can get a discharge from taxes incurred from wages, commissions, or from any other income source.
You must have filed an income tax return at least 2 years before you filed the bankruptcy case. The taxes also need to be assessed at least 240 days before filing the case. However, the period can get extended if you filed a bankruptcy case during that period, and it won’t matter whether or not you were discharged or dismissed from the case.
The tax debt should be at least 3 years old. This means the tax return must have been due at least 3 years from the date you filed for bankruptcy.
The debt is not a result of any fraud. You can’t get a discharge if you had filed a fraudulent return or tried to misguide the IRS by using a wrong SSN.
Can Chapter 13 bankruptcy discharge tax debt?
To answer that question, I can tell that it mostly depends on whether it’s a priority or non priority tax debt.
If it’s a nonpriority debt, it can be easily wiped out through a Chapter 13 bankruptcy. But, if it’s a priority debt, it needs to be paid back in full through the reorganization bankruptcy, Chapter 13.
Now, it is quite natural that a question will pop in your mind, how will you distinguish a nonpriority tax debt from a priority one?
Let’s discuss it in brief.
Priority tax obligations
Usually, through Chapter 13 bankruptcy, you need to repay your priority tax debts within a period of 3-5 years. Common priority tax debts are:
- Your income tax obligations in recent times
- Property taxes you’ve incurred within a period of 1 year before you filed bankruptcy
- Penalties due to non dischargeable taxes
- Taxes you were required to either collect or withhold
- Employment taxes
- Excise taxes
- Taxes due to custom duty
Nonpriority tax obligations
You can get a discharge from older income tax obligations if they qualify as nonpriority tax debts. However, you may have to pay a portion of such taxes.
How much you’ll pay will depend on your income and expenses along with your assets and bankruptcy exemptions.
It is a nonpriority tax if:
- You filed the return at least 2 years before filing the bankruptcy.
- The tax return was due at least 3 years before your bankruptcy filing.
- You were not involved in any willful tax evasion or any kind of fraud.
- The IRS has not assessed your liability for the income tax debt within 240 days before you filed Chapter 13. However, this 240-day period can get extended if you had filed bankruptcy due to which IRS stopped collection efforts or you had submitted an offer in compromise.
Getting discharged from tax lien - Is it possible?
Getting discharged from tax lien is a bit complicated matter. A tax debt is considered to be a nonpriority debt; but that doesn’t mean that you’ll get discharged from the lien placed on a personal property, placed before your filed bankruptcy, because of your tax debt. Filing bankruptcy will only wipe out your personal liability to pay the debt. In turn, the IRS will not go after you to garnish your wages.
So what do you need to do?
You will have to repay the lien before you can sell the property.
Therefore, it is always advisable to talk to a bankruptcy attorney and get your queries answered before you file bankruptcy. The lawyer can also help you decide which bankruptcy will be more favorable for your financial condition and which one you can qualify for.
However, while choosing one attorney, make sure you select a knowledgeable person who can answer your queries and who can guide you through the bankruptcy.
With proper help you can
- Lower your monthly payments
- Reduce credit card interest rates
- Waive late fees
- Reduce collection calls
- Avoid bankruptcy
- Have only one monthly payment