For individuals contemplating bankruptcy, understanding its impact on various aspects of their financial life is crucial, particularly when it comes to tax obligations.
Whether considering Chapter 7 or Chapter 13 bankruptcy, it’s essential to know how these decisions intersect with your responsibilities to the Internal Revenue Service (IRS) and state tax agencies.
Filing for bankruptcy is a legal process that provides relief from certain debts, but it interacts with tax obligations in specific ways. The type of bankruptcy you choose—Chapter 7 or Chapter 13—plays a significant role in how your tax debts are treated.
Chapter 7 bankruptcy, often referred to as liquidation bankruptcy, involves the discharge of unsecured debts.
However, when it comes to tax debts, only certain types qualify for discharge. These include income taxes that are at least three years old, where the tax returns were filed at least two years prior to the bankruptcy filing, and the taxes were assessed at least 240 days before filing.
Importantly, not all tax debts can be eliminated in Chapter 7 bankruptcy. Debts such as payroll taxes or penalties related to non-dischargeable taxes typically cannot be discharged.
In contrast, Chapter 13 bankruptcy, known as a reorganization bankruptcy, allows you to create a repayment plan to pay back your debts over three to five years.
This plan includes your tax debts.
What makes Chapter 13 different is that it can provide a structured way to catch up on back taxes while halting penalties and interest from accruing on those debts during the bankruptcy process.
Filing for bankruptcy does not exempt you from your future tax obligations. You are required to continue filing your tax returns and paying any new taxes that arise after the bankruptcy filing.
It’s essential to stay current with these obligations to avoid complicating your bankruptcy case or risking its dismissal.
Your tax refund can also be impacted by a bankruptcy filing.
In Chapter 7, tax refunds may be considered part of your bankruptcy estate and could be used to pay your creditors.
In Chapter 13, your tax refund may be factored into your repayment plan, potentially being used to pay off your debts.
One of the immediate effects of filing for bankruptcy is the imposition of an automatic stay. This stay halts most collection actions against you, including those by the IRS. However, the automatic stay doesn’t stop all tax-related actions.
For instance, the IRS can still audit you, demand a tax return, issue a tax deficiency notice, or demand payment of the assessment.
A significant issue in bankruptcy is how it deals with tax liens. If the IRS has placed a lien on your property for unpaid taxes, bankruptcy may not remove the lien. In Chapter 7, the lien can remain against any property you own, and in Chapter 13, you may have to pay the lien through your repayment plan.
Therefore, addressing tax liens requires careful consideration during the bankruptcy process.
While bankruptcy can offer relief from certain tax debts, it has limitations.
Notably, recent tax debts, trust fund taxes (like payroll taxes), and certain penalties and fines related to non-dischargeable taxes cannot be eliminated in bankruptcy.
Furthermore, tax evasion or fraudulently filed tax returns will not be discharged in bankruptcy.
If you’re considering bankruptcy, tax planning becomes crucial. Consulting with a bankruptcy attorney who understands the complexities of tax law is vital.
They can help you navigate the timing of your bankruptcy filing, which can significantly impact the dischargeability of your tax debts.
Staying compliant with tax laws is critical when filing for bankruptcy.
Filing accurate and timely tax returns, even during the bankruptcy process, is essential. Failure to do so can lead to complications in your bankruptcy case. It may also affect the dischargeability of your tax debts.
Filing for bankruptcy can provide relief from certain tax debts, but it’s not a blanket solution for all tax obligations. The type of bankruptcy filed, the nature of your tax debts, and your compliance with tax laws play crucial roles in determining how your tax obligations are affected.
It’s essential to approach bankruptcy with a full understanding of these factors. Seek the guidance of a knowledgeable attorney to navigate this complex intersection of bankruptcy and tax law.
For individuals struggling with debt and tax obligations, bankruptcy can offer a path forward, but it requires careful planning and adherence to legal and tax requirements.
At Blue Bee Bankruptcy, our lawyers are highly experienced in bankruptcy options. More importantly, we understand that each case we receive is unique and each client has different needs and goals. We will discuss these signs with you and decide the best route to take.
We strive to help our clients rebuild their lives and take steps toward a better financial future through filing.
If you’re dealing with the potential of bankruptcy, give us a call. Our team will work to help you by reviewing all of the options our firm has available. We will ensure you’ll get the best possible outcome for your situation.
Get in touch today so we can start working on either halting bankruptcies or preventing them from taking place altogether!