If you are deeply in debt, chances are you’re thinking about filing for bankruptcy and how it might help relieve your different debts. One aspect of debt that remains questionable for many is tax debt, and whether or not it can be discharged in a bankruptcy.
Chapter 7 Bankruptcy
You might have an easier time getting your tax debt discharged through a Chapter 7 bankruptcy, because this type eliminates almost all your debt and gives you a fresh start. However, not all tax debt can be discharged, so there are certain conditions to keep in mind:
- The tax debt must be income tax debt
- The tax debt is at least three years old
- The tax debt was assessed by the IRS at least 240 days before you filed your bankruptcy petition
- You filed a tax return for the debt you want to discharge at least two years before filing for bankruptcy
Bankruptcy will not forgive any tax debt that was incurred through fraudulent activity, so if you willfully attempted to defraud the IRS or evade paying your taxes, you will still owe this debt.
Chapter 13 Bankruptcy
In a Chapter 13 bankruptcy, your tax debts will not be discharged; rather, they will be added into your unsecured debts and paid out of your Chapter 13 payment plan after all priority debts and secured debts have been paid. A tax debt is considered unsecured if it’s income tax and it meets the same time period conditions as the Chapter 7 tax debt (i.e., it’s at least three years old, it was assessed by IRS at least 240 days before bankruptcy was filed, and a return was filed for it at least two years before bankruptcy was filed.) As with Chapter 7, the tax debt cannot be incurred from tax evasion or fraud.
Tax debts That Cannot Be Discharged
There are some tax debts that cannot be discharged, no matter what type of bankruptcy petition you file. For example, you cannot discharged most non-income tax debts, such as property tax, in either Chapter 7 or Chapter 13 bankruptcy. In Chapter 13, these debts become priority debts, so they will be paid back from the Chapter 13 payment plan first. Chapter 13 bankruptcy does have an advantage over Chapter 7 in that you are able to pay this debt over time through your payment plan, rather than owing it right away. What’s more, your payment plan often allows you to pay your priority debts back at 0% interest rate, which is a better plan than most debt collecting companies could ever offer you.
Another debt that will not be discharged is a tax lien incurred on your property. In Chapter 13, this debt is not necessarily a priority debt, but it is a secured debt, so you will need to include it in your payment plan. A Chapter 7 bankruptcy will eliminate your personal debt and will stop the IRS from going after your job wages or your bank accounts, but it will not eliminate a tax lien. If the IRS put a tax lien on your property, you will need to pay off the lien if you wish to sell your property.
Tax debt is just one aspect of a bankruptcy petition, but it is an important factor to consider. What you owe the government can determine if you should file for bankruptcy, or what type of bankruptcy you will choose. You may want to talk with an experienced bankruptcy attorney who can educate you on your options and help draw up a plan that is right for your situation. If you’d like to learn more about how to handle your tax problems, call the Ohio bankruptcy attorneys at Luftman, Heck, and Associates today at (216) 586-6600 to find out how we may be able to help.