If you’re struggling with tax debt, you may be wondering if bankruptcy is an option for getting a fresh start. While bankruptcy can be a powerful tool for eliminating some types of debt, not all tax debt can be discharged through bankruptcy. In this article, we’ll take a closer look at how bankruptcy affects tax debt and what factors determine whether your tax debt can be discharged.
Introduction to Tax Debt and Bankruptcy
Before we dive into the details of how bankruptcy affects tax debt, let’s first define what we mean by these terms. Tax debt refers to money that you owe to the government as a result of failing to pay your taxes on time or not paying the correct amount. Bankruptcy, on the other hand, is a legal process that allows individuals and businesses to discharge certain types of debt and get a fresh start.
When you file for bankruptcy, the court will review your debts and assets to determine how to distribute your assets to creditors. Depending on the type of bankruptcy you file, some of your debts may be discharged (eliminated) while others may be restructured (reorganized). This process can be a powerful tool for getting your finances back on track, but it’s not without its drawbacks.
Types of Taxes That Can Be Discharged in Bankruptcy
The types of taxes that can be discharged in bankruptcy depend on several factors, including the age of the tax debt, the type of tax owed, and whether you filed a tax return for the debt in question. Generally speaking, income taxes are the most common type of tax debt that can be discharged in bankruptcy, but there are several conditions that must be met.
First, the tax debt must be at least three years old. Second, you must have filed a tax return for the debt in question at least two years before filing for bankruptcy. Finally, the IRS must have assessed the tax debt at least 240 days before you file for bankruptcy. If these conditions are met, you may be able to discharge your income tax debt through bankruptcy.
Factors That Determine Whether Tax Debt Can Be Discharged
While the age of the tax debt and whether you filed a tax return are important factors in determining whether your tax debt can be discharged, there are several other factors that can come into play. For example, if the IRS has filed a tax lien against your property, this may complicate the process of discharging your tax debt through bankruptcy.
Similarly, if you engaged in fraudulent activity or willful tax evasion, you may not be able to discharge your tax debt through bankruptcy. Additionally, if you owe taxes for a tax year that is less than three years old, you may not be able to discharge that debt through bankruptcy even if you meet the other conditions.
What Happens to Tax Debt in Chapter 7 Bankruptcy
If you file for Chapter 7 bankruptcy and your tax debt meets the conditions for discharge, the debt will be eliminated through the bankruptcy process. However, it’s important to note that not all tax debt can be discharged in Chapter 7 bankruptcy, and you may still be responsible for paying some tax debt after the bankruptcy process is complete.
Additionally, if you have assets that are not exempt (protected from creditors) under bankruptcy law, the bankruptcy trustee may sell those assets to pay your creditors, including the IRS. This can include assets such as a second home, a valuable collection, or a luxury vehicle.
What Happens to Tax Debt in Chapter 13 Bankruptcy
Chapter 13 bankruptcy is a type of bankruptcy that allows you to restructure your debts and create a repayment plan. If you owe tax debt that cannot be discharged in Chapter 7 bankruptcy, you may be able to include that debt in your Chapter 13 repayment plan.
Under a Chapter 13 plan, you’ll make regular payments to a bankruptcy trustee for a period of three to five years. The trustee will then distribute those payments to your creditors, including the IRS. At the end of your repayment plan, any remaining tax debt that was included in the plan may be discharged.
Alternatives to Bankruptcy for Resolving Tax Debt
While bankruptcy can be an effective way to eliminate some types of tax debt, it’s not the only option. If you owe a relatively small amount of tax debt, you may be able to work out a payment plan with the IRS. This can allow you to pay off your tax debt over time without having to file for bankruptcy.
Additionally, if you’re facing financial hardship, you may be able to negotiate an offer in compromise with the IRS. An offer in compromise allows you to settle your tax debt for less than the full amount owed. However, this option is only available in certain circumstances and requires careful negotiation with the IRS.
Can You File Bankruptcy on IRS Debt?
Yes, you can file for bankruptcy on IRS debt in certain circumstances. However, as we’ve discussed earlier in this article, not all tax debt can be discharged through bankruptcy. If you owe IRS debt that is more than three years old and meets the other conditions for discharge, you may be able to eliminate that debt through bankruptcy.
The Impact of Bankruptcy on Your Credit Score
One of the biggest concerns for many people considering bankruptcy is the impact it will have on their credit score. While bankruptcy can have a negative impact on your credit score, it’s important to remember that the impact is not permanent.
Bankruptcy will remain on your credit report for up to ten years, but its impact will diminish over time. Additionally, if you take steps to rebuild your credit after bankruptcy, you can begin to see improvement in your credit score within a few years.
How to Determine if Bankruptcy Is the Right Option for Your Tax Debt
Deciding whether to file for bankruptcy to eliminate tax debt can be a difficult decision. On the one hand, bankruptcy can be a powerful tool for getting a fresh start and eliminating debt that may be weighing you down. On the other hand, bankruptcy can have long-term consequences and may not be the best option for everyone.
If you’re struggling with tax debt and considering bankruptcy as an option, we are here to help. You could greatly benefit from the knowledge and experience of an attorney that specializes in bankruptcy and tax law. Contact Elias today for a free consultation.