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Bankruptcy and your tax debt

On Behalf of | Feb 8, 2019 | Firm News |

Struggles with debt can affect every area of your life. If you have fallen behind on your mortgage, credit card bills, medical debt or others, you may be feeling as if you are drowning. Collection letters and calls seem to come every day, and you may find it difficult to eat, sleep, and concentrate on your work or family obligations. After considering your options, you have decided to see if bankruptcy can bring some relief.

However, if your debt burden includes taxes, you will need to understand the rules regarding bankruptcy and federal debts. Taxes are a priority debt, which means bankruptcy may not relieve your obligation to pay them except under certain circumstances.

Understanding bankruptcy

The goal of bankruptcy is to pay in full as much of your debt as possible. If you file for Chapter 7, this repayment occurs after the liquidation of some of your assets. With Chapter 13, you create a payment plan for your debts that extends for several years. After liquidation or at the end of your payment plan, those debts that remain can be discharged, or wiped clean.

This cannot happen with federal taxes. In Chapter 7, your liquidated assets will pay priority debts first, including taxes, and the IRS wants the full amount you owe. With Chapter 13, your payment plan must include the full amount to the IRS, and your proceedings will not discharge that debt at the end of the bankruptcy.

When is tax debt dischargeable?

Under certain conditions, the court may discharge your tax debt if you file under Chapter 7, including these five:

  • The taxes in question were due at least three years in the past, including any extensions the IRS may have granted.
  • You filed the tax return for the debt at least two years ago. You may not seek the discharge of any tax debt for which you have not filed a return.
  • The assessment for the tax occurred at least 240 days before you file for bankruptcy.
  • You did not commit fraud on your tax return.
  • You are not guilty of trying to evade your tax obligation.

If you owe taxes for multiple years, some debt may qualify and others may not. Additionally, on the date you file for bankruptcy, if you have not filed your taxes for the last four years, you will not qualify for bankruptcy, so it is important to get these matters squared away before you begin the bankruptcy process. Seeking help from a bankruptcy attorney in California may offer some peace of mind as you pursue a brighter future free from debt.