What Happens to Tax Debt if I File for Bankruptcy
Bankruptcy laws vary from one situation to another. For example, Chapter 7 discharges a debtor from tax debt. In Chapter 13, on the other hand, all debts enter a repayment plan. In some cases, bankruptcy can discharge income tax, like any other unsecured debt. But income tax cannot be discharged if you have failed to file income tax for two years or are under IRS’s automatic filing program.
Bankruptcy and Taxes: Do You Qualify for Discharge
Are you eligible for tax debt discharge? Well, discharge depends on
- The type of tax
- How long you have been under tax debt
- Whether you have filed a return
- What is the type of bankruptcy
In Chapter 7, federal income taxes are dis-chargeable if you meet the following conditions:
- Legitimate tax returns were filed at least two years before bankruptcy.
- The tax liability is from a tax return due three years before bankruptcy.
- IRS assessed the tax debt 240 days before bankruptcy.
- This is not a case of willful tax evasion
- There are no charges of tax fraud against you.
- Penalties on dis-chargeable taxes qualify for discharge.
Tax Debt Not Eligible for Discharge
- If there are any tax debts arising from unfiled tax returns, they are not eligible for bankruptcy discharge.
- Taxes withheld from an employee’s paycheck do not qualify for discharge.
Chapter 7 Bankruptcy and Taxes
Chapter 7 bankruptcy calls for tax discharge if your tax debt is not more than $250,000. Anybody who owes more money than this must file for Chapter 13 bankruptcy for tax discharge. Another requirement is that the tax debt must be a minimum of three years old and assessed 240 days before bankruptcy.
What To Do if I Default On My Taxes?
Anybody who defaults on their taxes must not delay in contacting the IRS, which will help you repay the debt. Remember, unless you contact the IRS, they will do everything to collect your debt. They may not hesitate to take your tax refund. In that case, it is in your best interest to contact an experienced bankruptcy attorney to guide you through the precarious situation.
The IRS begins with sending a notice of past-due taxes and then sending letters, which are legal notices. IRS may file a lien, garnish wages, and seize a bank account. It is here that bankruptcy can come to your rescue as the automatic stay puts to a stop these actions of the IRS.
As long as automatic stay is imposed, creditors cannot contact you for debt collection. As a result, IRS agents are forbidden from sending you even a single letter about your taxes or asking for debt collection.
An automatic stay protects you from debtors and their threatening communication. Moreover, any creditor who violates the stay might face serious consequences. Since you can still initiate conversation with debtors, bankruptcy gives the control of negotiations in your hands.
Get legal help immediately if you are faced with tax debt concerns. Consult with the best debt settlement lawyers to determine if you are eligible for bankruptcy for tax debts. Get started immediately.