Tax debts and bankruptcy

Some Michigan consumers who feel overwhelmed by their financial obligations might consider filing for bankruptcy. Most types of unsecured debt can be discharge, but people should be aware that most tax liabilities cannot be.

Generally, it is not possible for a person to discharge tax debt for which a return was not filed, withholding taxes that the person is liable for or taxes related to a fraudulent return. If a person willfully tried to evade taxes or filed returns late within two years of bankruptcy, these also cannot be discharged. For tax debts that are dischargeable, a few elements must be in place. They must be related to a tax return filed at least two years prior to the bankruptcy filing or due at least three years prior to it. The tax must be assessed a minimum of 240 days prior to the bankruptcy filing. There are other rules associated with different types of taxes such as penalties and property tax. An involuntary bankruptcy may also have different rules.

People might want to consult an attorney about specific situations as well as whether to file a Chapter 7 or Chapter 13 bankruptcy. With the former, non-exempt property is sold with the proceeds going to creditors while in the latter, debts are restructured under a payment plan that runs either three or five years.

A Chapter 13 bankruptcy might allow a person to keep some property such as a home. Certain assets may be exempt with a Chapter 7 bankruptcy as well. There are also several other types of debts that cannot be discharged in a bankruptcy. Most student loan debt as well as alimony and child support payments cannot be discharged. However, if debts such as credit card and medical debts are discharged, this may free up income for people to make payments on tax, student loan and other obligations.