We get this question a lot – especially around tax time! We offer a fresh start and you want to know if it applies to your mounting tax debts. Can filing bankruptcy eliminate tax debts? The short answer? Maybe. But only in very specific circumstances. The good news is, we’re experts. So if you have a chance to eliminate some of your debts we will be the first to let you know! But there are ways that bankruptcy can help with tax debt.
First, you should know that as soon as you file any bankruptcy case something called an automatic stay, or an injunction immediately goes into effect. This means that any creditors, including the IRS must stop any action against you. There will be no more letters, calls or garnishing your income. This stay will be in place until your bankruptcy is completely discharged (there are some exceptions to this rule, but not very many). So even if your debts are not eligible to be eliminated by bankruptcy, we can help you stop the collection against you so you have a chance to breathe and plan for your future.
So, when can tax debts be eliminated with bankruptcy?
While we would like to discuss your case in person, here’s some basic tax return parameters on eliminating tax debts. First, tax debts can only be discharged if they have been filed and the debt is over three years old. They are more likely to be discharged in a Chapter 7 bankruptcy than a Chapter 13. Chapter 13 can help you organize a repayment plan you can actually manage. This way you can discharge older, unsecured IRS debt and you’ll pay back any debt not eligible for discharge over a three to five year period.
Discharge depends on the type of tax debt you have, if you filed a return and how old your tax debt is.
Then, in legal terms, here’s how tax debts may eligible for discharge (or elimination).
1- If the debts are income taxes. Other kinds, like payroll taxes or penalties are not eligible.
2- You filed a legitimate tax return for the relevant years, and those returns were filed at least two years before you filed for bankruptcy.
3- The income taxes were due at least three years before you file for bankruptcy.
4-No IRS tax assessment has occurred at least 240 days before you filed for bankruptcy. This is the process of recording the taxes as a tax liability.
5- You did not commit tax evasion or tax fraud.
There are a lot of timelines and specific laws that apply to eliminating tax debt. Hence the reason for the popular saying about the inevitability of death and taxes. That’s why you’ll want an experienced attorney if you’re trying to use bankruptcy to help with tax debt. We’re just the team for the job!
Some other things you’ll want to know.
If you’ve incurred penalties on taxes, but those taxes are eligible for discharge, the penalties are too. Once you discharge those liabilities through bankruptcy, the IRS may not garnish your wages any more.
If the IRS places a federal tax lien on your property before you file for bankruptcy, that lien will stay in place. Even if you discharge some of your tax debts. That means that after your bankruptcy you will still have to pay to clear the lien by paying it off. You’ll have to do this before you’ll be able to sell the property.
Don’t do it alone.
Trying to eliminate or reorganize tax debt is complicated. This page is a brief run-down, but there are a lot of minute details and specific laws to consider. And we don’t want you to file bankruptcy if it won’t help you get relief and a fresh start. That’s why we offer free consultations. Some clients come in with their case and after a thorough consultation it’s clear that bankruptcy is not the right answer. We promise to be honest with you if that’s the case. If bankruptcy is a good way for you to start over, we’re committed to seeing you through it all. Let us help you, call Rank & Karnes Law, P.C. to be your legal team.