Individuals Families and
Small Business Owners
People may turn to bankruptcy with the hope that their tax debt will be eliminated. Outstanding federal tax debt can cause stress, but there are strategies to help you conquer certain debt. The reality is that most tax debts are not cleared in bankruptcy. Debtors will likely continue to owe taxes, aside from income taxes, at the end of a Chapter 7 bankruptcy case, or be required to repay them in full through their Chapter 13 repayment plan. Even if you cannot discharge all your taxes by filing for bankruptcy, the DuPage County attorneys at the Bankruptcy Center of Illinois can help you make an informed next step toward financial security.
One advantage of filing for bankruptcy is that after a bankruptcy petition is filed, an automatic stay takes effect. The IRS cannot make an attempt to collect outstanding debt. This powerful tool protects debtors from creditors reaching out and contacting them about their debt.
Chapter 7 bankruptcy is generally preferred to Chapter 13 if you need to discharge tax debts. There are certain conditions that must be met to discharge taxes. Additionally, eligibility for filing Chapter 7 bankruptcy must be met.
First, the taxes must be income taxes.Second, bankruptcy cannot help with a situation in which there was fraud or willful evasion. For example, if a debtor filed a fraudulent tax return or used a false Social Security number on their tax return, bankruptcy will not discharge these taxes.
Procedurally, taxes must be at least three years old before filing for bankruptcy. The debtor must have filed a tax return for the debt they wish to discharge at least two years before they filed for bankruptcy. Late returns do not count as a return for discharge purposes. Additionally, there is a time limit, known as the “240 day rule.” At least 240 days must have passed since the IRS assessed the income tax debt and you filed your bankruptcy petition.
Certain debt, such as student loan debt is not typically discharged during Chapter 7 bankruptcy. In most cases, debtors must show undue hardship in order to discharge student loan debt. Other tax debt that may not be discharged includes recent property taxes, sales taxes, trust fund sales and employment taxes.
A chapter 7 bankruptcy filing can discharge personal obligations to pay certain taxes, and prevent the IRS from pursuing your wages or bank account. However, if the IRS has a recorded tax lien on property before you filed for bankruptcy, the lien will remain. Recorded tax liens cannot be discharged. You would be required to pay the tax lien before selling and then transferring the property’s title to a new home owner.
Chapter 13 bankruptcy provides a way to discharge certain debt. Taxes older than three years may be forgiven without payment, depending on how much income you are left with after expenses are deducted. Tax debt is then classified as either priority claims or non-priority unsecured claims. Priority tax debts includes employment taxes, property taxes, and Medicare, among others. These must be paid in full. Debtors will often only pay a portion of their non-priority unsecured claims, including their tax debt.
If you have non-priority unsecured claims, those would be paid after priority and secured claims are completely paid. A percentage of unsecured debt is usually paid. For example, income tax that meets the conditions above, for Chapter 7 tax debt relief, would be non-priority and unsecured.
Before filing a Chapter 13 bankruptcy case, you must be up to date on your tax returns. Before the meeting of creditors, you will provide copies of tax returns for the four previous years to the Chapter 13 trustee.
At the Bankruptcy Center of Illinois, we understand the importance of adhering to procedural rules and are ready to help you secure tax debt relief. Our taxes and bankruptcy DuPage County attorneys are here to help you understand the impact of filing for bankruptcy on your tax debt. If you are considering filing for bankruptcy, contact us by phone at (773) 993-0024 or online.