Three Important Things to Know about Bankruptcy and Taxes

Bankruptcy offers relief when debts have gotten out of control.

Chapter 7 bankruptcy results in a discharge of certain debts, which means creditors must stop pursuing you for payment and you’re no longer legally obligated to pay the debts.

Unfortunately, there are some debts that aren’t treated the same as others in bankruptcy, which means even if you file, you’ll still be responsible for those debts.

Tax debt – money you owe to the IRS on your income – is one of those bankruptcy exceptions. In most cases, if you file for bankruptcy, the discharges you’re granted will not include money you owe in back taxes.

However, bankruptcy can offer some relief for IRS debt, so it’s important to work with a bankruptcy professional so you know exactly what to expect concerning tax debt.

What are three things you should know about how tax debt is treated in bankruptcy?

Tax Debt Can Be Managed in Bankruptcy

Even though filing for bankruptcy doesn’t outright eliminate tax debt, it can help you gain control of your situation.

For starters, some penalties related to tax debt are dischargeable. Since many people are dealing with huge tax bills that are due, at least in part, to the penalties that come from not paying taxes, this can be a big relief.

There are also certain tax debts that can be discharged.

For instance, older tax debt owed in tax years where you filed but did not pay might be dischargeable, depending on how old it is. A bankruptcy attorney can review your tax situation and help you determine if what you owe is dischargeable.

Income taxes due more than three years before you file for bankruptcy for which you filed an on-time and non-fraudulent return might be dischargeable in bankruptcy, whether you file for Chapter 7 or Chapter 13.

Chapter 13 Can Make It Easier to Meet Tax Obligations

Of course, not everyone is dealing with a tax debt that is more than three years old.

In many cases, mounting tax debt spirals into other financial problems and within a couple of years, bankruptcy is the most viable option.

Despite not being able to discharge some of what you owe to the IRS, filing for Chapter 13 can make it easier to pay what you owe. A Chapter 13 repayment plan allows you to pay your taxes without interest, which means overall you won’t owe as much.

To learn more about Chapter 13 repayment plans, check out this article from The Balance.

Bankruptcy Provides the Relief of the Automatic Stay

One of the biggest advantages of filing for bankruptcy is the relief the automatic stay provides.

The automatic stay legally restricts collection efforts against you. This means once you file, debt collectors must stop contacting you. They can no longer call you, file lawsuits against you, or pursue debt collection in any other manner.

And the automatic stay applies to tax debt collectors as much as everyone else pursuing you.

Filing for bankruptcy stops some collection actions by the IRS, including wage garnishment and seizure of bank accounts and other assets, at least temporarily.

Whether you’re dealing with tax debt, or medical bills or consumer debt, or a combination of any of the above, bankruptcy can offer the relief you’ve been searching for. It’s one of the best tools you have for getting your situation under control and gaining some breathing room to sort through your situation.

If you’d like to know more or you have questions about how bankruptcy affects tax debt, contact the Law Office of Robert M. Geller at 813.254.5696 for more information.