If you’re behind on rent or struggling to pay bills, it can be easy to let your taxes slip. If your circumstances worsen, however, you may find yourself facing significant tax debt in addition to your other debts, and you may wonder what options are available to you. Can you file bankruptcy on taxes, and discharge your tax debt that way?
While you may hear radio commercials claiming that you can wipe out all of your tax debt through bankruptcy, the reality of the situation is more complicated than that. Certain tax debts do qualify for discharge in Chapter 7 bankruptcy, and others don’t. There may also be IRS programs that can help you settle your tax debts. At the Law Office of Jack G. Lezman, PLLC, we can help you understand your options.
When Can You Discharge Tax Debt in Bankruptcy?
You can discharge tax debt given that specific conditions are met:
- The taxes you are attempting to discharge are income taxes;
- You did not commit any form of tax fraud or tax evasion;
- Your tax debt is at least three years old;
- You filed a tax return for the debt you are attempting to discharge; and,
- The IRS has not assessed the outstanding debt in the last 240 days.
If you fail one of the above criteria, your Charlotte bankruptcy attorney may be able to discuss options with you for discharging the debt. While the above rules are general principles and usually enforced, there are exceptions that may prove useful to your particular case.
Tax Debt and Chapter 7 vs. Chapter 13 Bankruptcy
Tax debt can be discharged in Chapter 7 so long as it meets the above criteria. It is discharged completely meaning you no longer owe those taxes. Chapter 13 and Chapter 11 work differently. They both require a payment plan in order to settle the outstanding debt. In Chapter 13, this repayment plan is executed over the course of three or five years. If all the debts cannot be paid in that time period, the rest will be discharged.
In Chapter 13, certain debts are given priority over others. Tax debts, of course, are the highest priority.
Filing for Chapter 13 to Deal with Tax Debt
During a Chapter 13 bankruptcy, all of your debts are consolidated into one monthly payment that addresses all of the outstanding debts. If you have numerous debts, including unsecured debts, secured debts, and tax debt, Chapter 13 can offer you some relief. It does not necessarily offer you relief from the tax debt, but it frees up your money to pay off that tax debt while not paying off other lower-priority debts.
Chapter 13 works by taking into account your monthly finances and creating a repayment plan that is within your means with tax debt being prioritized the highest. In order to discharge any part of your tax debt, you must meet the same basic conditions that were mentioned above. Those who filed fraudulent taxes, never filed a return, or willfully attempted to evade tax payment, can roll their tax debt into their Chapter 13 repayment plan, but it will not be discharged by the bankruptcy. In this case, the debt will survive the bankruptcy and require payment. You may, however, still qualify to have other debts partly forgiven.
Tax Liens and Bankruptcy
One thing that bankruptcy can’t do is get rid of a tax lien. If the IRS filed a Notice of Federal Tax Lien before you filed for bankruptcy, then the lien will remain on your property until the debt is satisfied in full. If the tax lien was filed during the bankruptcy or after the bankruptcy filing, the IRS will (usually) remove the lien.
Can You File Bankruptcy on Taxes? Ask a Charlotte Bankruptcy Attorney
Filing for bankruptcy can present you with a number of complicated choices. And those choices can have a huge impact on your financial future. The Law Office of Jack G. Lezman, PLLC can help you fully understand your options and make well-informed decisions. Contact us today to learn more.