Worried About Tax Debt? Bankruptcy Could Be the Solution

Many consumers incorrectly assume that tax debts cannot be eliminated through bankruptcy. In fact, under the right circumstances, filing for bankruptcy may be the best way to blunt or eliminate tax burdens.

Tax Debts in Chapter 7 or Chapter 13 Bankruptcy

There generally two types of consumer bankruptcy, Chapter 7 and Chapter 13. In a Chapter 7 case, your valuable assets will be liquidated (sold) and most types of debts will be discharged almost immediately. A Chapter 13 case, on the other hand, involves the establishment of a court-approved plan that allows for repayment of debts over a three to five year term; at the end of that time (and if the repayment plan has been followed successfully), most types of remaining debt will be discharged.

Usually, tax debt cannot be eliminated in a Chapter 7 bankruptcy. If the IRS files a Notice of Federal Tax Lien, your tax debt becomes secured, giving the IRS a legal claim against any property you own. This type of lien survives against the value of any property you had at the time you filed for Chapter 7 bankruptcy (if you owned property valued at less than the lien amount, the lien value will be reduced to the value of your property).

A Chapter 13 bankruptcy may be a better option for dealing with tax debt. Even secured debt can be factored into your court-approved repayment plan; this potentially means making structured, manageable payments towards your tax debt over a period of time (usually five years) with a complete discharge of any remaining tax obligations (including tax liens) upon completion.

Several criteria must be met in order to qualify for discharge of income tax debt under either Chapter 7 or Chapter 13. First, the due date for filing the tax return at issue must have been at least three years ago, and the return must have actually been filed at least two years ago. In addition, the IRS must have assessed the tax at least 240 days before the bankruptcy filing. Finally, the tax return in question cannot be fraudulent, and your failure to pay cannot be attributable to tax evasion.

Looking For Assistance

If you are suffering from an overwhelming debt load that includes tax obligations, get help from an experienced attorney. Bankruptcies that involve tax debt are complicated, and your attorney will be able to explain which debt relief solution will be best for your individual circumstances.

Dealing with overdue taxes can be a major headache. But, with the right help, you can make the process as swift, effective and painless as possible.