The Different Chapters Of Bankruptcy
There are six numbered chapters of bankruptcy filings. Chapters 7, 11, 12, and 13 are applicable to individuals in different circumstances.
Bankruptcy chapters 9 and 15 aren’t applicable to tax debts.
Chapter 7 is sometimes called a “straight” bankruptcy, because it provides for the full discharge of allowable debts. The bankruptcy court effectively takes control of your assets and liquidates them as necessary to pay off as much of your debt as possible. You’re no longer responsible for those unpaid balances after your bankruptcy discharged if you don’t have sufficient assets to cover all your debts.
Chapter 13 bankruptcy involves a multiyear, court-approved payment plan to repay your debts to the greatest extent possible. The goal is to pay them off in full, but some balances that can’t be paid can be discharged.
Chapter 11 allows for debt reorganization and a repayment plan similar to a Chapter 13 filing, but it is generally used by incorporated businesses or individuals whose debt is in excess of the limits for a Chapter 13 filing. That limit is $394,725 as of 2020.
Chapter 12 is intended for family farmers and fishermen who are financially distressed by expenses related to their businesses. It’s intended to be a quicker method of filing and designing a repayment plan. There are also limits to how long creditors can collect on debts under this chapter.
Tax Debt: Bankruptcy And The Automatic Stay
Most IRS collections start with a notice of past-due taxes. Then, every few months, the IRS sends another letter. Each is slightly more threatening than the last. Eventually, these letters become legal notices. They also sometimes involve filing a lien, seizing a bank account, or garnishing wages. The automatic stay acts as a pause button. It prevents creditors from contacting you to collect their debts. As soon as you file your voluntary petition, the automatic stay usually takes effect. When that happens, IRS agents can’t even send you a letter about your back taxes. They are forbidden from trying to collect the debt.
The automatic stay extends to property as well. Although most of your personal property is exempt â or protected â during Chapter 7, the IRS and other debt collectors can’t touch any of the more valuable assets you happen to own.
An automatic stay is a powerful tool for protecting individuals. No matter what stage IRS collection efforts are in, the automatic stay stops them cold. With few exceptions, the stay applies to all forms of communication between debtors and creditors. Creditors who violate the stay can face serious consequences. And, although the stay prevents creditors from contacting you, it does not prevent you from beginning conversations with them. This puts you in control of negotiations with your creditors during bankruptcy.
Can You Discharge Tax Liens In Bankruptcy
If your income taxes qualify for discharge when you file a Chapter 7, federal tax liens that were recorded by the IRS prior to your bankruptcy filing wont be wiped out. Even if the debt related to the lien is discharged, it will remain on your property and you need to pay it off before the propertys title can be sold or transferred to a new owner. Furthermore, the automatic stay only applies to new lien petitions and not to existing ones.
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Filing For Chapter 13 To Deal With Tax Debt
During a Chapter 13 bankruptcy, all of your debts are consolidated into one monthly payment that addresses all of the outstanding debts. If you have numerous debts, including unsecured debts, secured debts, and tax debt, Chapter 13 can offer you some relief. It does not necessarily offer you relief from the tax debt, but it frees up your money to pay off that tax debt while not paying off other lower-priority debts.
Chapter 13 works by taking into account your monthly finances and creating a repayment plan that is within your means with tax debt being prioritized the highest. In order to discharge any part of your tax debt, you must meet the same basic conditions that were mentioned above. Those who filed fraudulent taxes, never filed a return, or willfully attempted to evade tax payment, can roll their tax debt into their Chapter 13 repayment plan, but it will not be discharged by the bankruptcy. In this case, the debt will survive the bankruptcy and require payment. You may, however, still qualify to have other debts partly forgiven.
Nondischargeable Income Tax Debt In Chapter 7 Bankruptcy
Priority debts get pushed higher up on the debt-repayment ladder. If money is available to pay creditors in a Chapter 7 case, priority debts get paid before most other debts. You’ll also remain responsible for any remaining balance after your bankruptcy case endsthe amount owed won’t be discharged. Learn more about the differences between priority and nonpriority claims in bankruptcy.
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Which Type Of Bankruptcy Discharges Debt Fastest
There is a major difference in the amount of time it takes to discharge debt through each of the options above. When you file for Chapter 7 bankruptcy, debt can be discharged in a matter of only a few months. With Chapter 13 bankruptcy, the debtor must follow their payment plan flawlessly for several years. Since Chapter 7 bankruptcy is the faster and more common option, well focus our attention on that for the remainder of the article.
Tax Debt Not Eligible For Discharge
The following types of tax debt are not dischargeable in Chapter 7 bankruptcy:
- Tax penalties from tax debt that is ineligible to be discharged
- Tax debts from unfiled tax returns
- Trust fund taxes or withholding taxes withheld from an employee’s paycheck by the employer
A debtor unable to discharge tax debt under Chapter 7 may consider other arrangements, such as entering into an installment agreement with the IRS or making the IRS an offer in compromise which will result in the settlement of the tax debt for less than the amount owed.
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Bankruptcy And Taxes: Qualifying For Discharge
Whether you can discharge tax debt will depend on the type of tax, how old the tax debt is, if you filed a return, and the type of bankruptcy. Federal income taxes in Chapter 7 are dischargeable if you meet all of the following conditions:
- The discharge is for income taxes: Payroll taxes and penalties for fraud are not eligible for discharge.
- You filed legitimate tax returns: You filed a tax return for the relevant tax years at least two years before filing for bankruptcy.
- The tax liability is at least three years old: The tax debt is from a tax return that was originally due at least three years before filing for bankruptcy.
- You are eligible under the 240-day rule: The IRS assessed the tax debt at least 240 days before you filed for bankruptcy. If the IRS suspended collection activity during negotiation, the applicable date may be extended.
- You did not commit willful tax evasion: Possible evasive actions include changing your Social Security number, your name, or the spelling of your name repeated failure to pay taxes filing a blank or incomplete tax return and withdrawing cash from a bank account and hiding it.
- You did not commit tax fraud: The return contains no information that was intended to defraud the IRS.
What Happens To My Irs Tax Debt If I File Bankruptcy
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In a Nutshell
The most common of all of debts owed to the IRS is unpaid income taxes, also known as back taxes. Chapter 7 bankruptcy is an option if your tax debt meets certain requirements.
Written byAttorney Jonathan Petts.
Debts owed to the IRS come in many shapes and sizes. The most common type of debt people owe to the IRS is back taxes, also known as unpaid income taxes. Now that more people freelance full time or moonlight part time, back taxes are a bigger issue than ever.
Looming unpaid debt can be stressful, and the IRS can be aggressive in its efforts to collect back taxes. As a public entity, the IRS is the worldâs largest debt collector, and it has many tools that private debt collectors can only dream of. Fortunately, filing Chapter 7 bankruptcy is a straightforward way to stop IRS harassment. In many cases, as outlined below, bankruptcy might end IRS harassment for good.
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Is A Tax Return Required During The Bankruptcy Process
If youâre filing for Chapter 7 or 11 bankruptcy, the trustee that takes charge of your assets must make sure a tax return gets filed. Chapter 13 bankruptcy requires tax returns from the last four years.
In any case, every tax return has to be filed in accordance with an original or extended deadline, or else the bankruptcy case will either be dismissed or changed into a different chapter.
Bankruptcy And Taxes: Eliminating Tax Debts In Bankruptcy
In many cases, a debtor is still liable for tax debt after bankruptcy. However, bankruptcy law allows the discharge of tax debt in some circumstances.
A debtor is more likely to have tax debt discharged in Chapter 7 bankruptcy than in a Chapter 13 bankruptcy. In Chapter 13, tax debt, along with other debt, enters a repayment plan. Chapter 7 bankruptcy, on the other hand, allows a debtor to discharge certain kinds of debt, such as credit card debt and medical bills, and in some instances, federal tax debt.
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What Are Some Other Solutions For Tax Debt
If unpaid tax debt has you considering bankruptcy, you may want to explore other solutions first especially in light of the complex rules for bankruptcy and taxes.
These alternatives could include entering into an installment agreement with the IRS, making a deal with the IRS to delay collection efforts, or entering into an offer in compromise. An offer in compromise is an agreement between you and the IRS that allows you to pay a reduced amount.
There are pros and cons to each of these approaches. For example, youll need to pay a user fee for an installment agreement and will owe fees, interest and possible penalties. And the IRS wont always accept an offer in compromise.
Still, because these solutions address only your tax debt and dont affect other areas of your finances as much as bankruptcy does, they could be worth considering.
Can You Discharge Tax Debt With Bankruptcy
If youre behind on rent or struggling to pay bills, it can be easy to let your taxes slip. If your circumstances worsen, however, you may find yourself facing significant tax debt in addition to your other debts, and you may wonder what options are available to you. Can you file bankruptcy on taxes, and discharge your tax debt that way?
While you may hear radio commercials claiming that you can wipe out all of your tax debt through bankruptcy, the reality of the situation is more complicated than that. Certain tax debts do qualify for discharge in Chapter 7 bankruptcy, and others dont. There may also be IRS programs that can help you settle your tax debts. At the Law Office of Jack G. Lezman, PLLC, we can help you understand your options.
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What Kinds Of Debts Does Bankruptcy Not Erase
How does bankruptcy affect taxes? It can discharge tax dues. However, there are those that cannot be erased regardless if you file a Chapter 7 or Chapter 13.
- Child and spousal support Bankruptcy wont get rid of your alimony obligation and child support. You need to pay them in full whether you file for a Chapter 7 or Chapter 13 bankruptcy.
- Student loans You need to pay back your student loans even if youre filing for bankruptcy. This type of debt can be eliminated only if you can prove that paying it back will cause undue hardship.
Other non-dischargeable debts include:
Buttax Liens Don’t Go Away
If the IRS has already placed a lien on your property, you’re out of luck. Even if you can discharge an income tax obligation, the discharge only wipes out your liability for the debtthe lien will not go away. So even though the IRS won’t be able to garnish your wages to collect the discharged tax debt, you’ll need to pay off the lien when you sell the property.
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Chapter 13 Bankruptcy And The Irs
Chapter 13 bankruptcy works with your creditors and basically puts you on a payment plan for your debts. They are not completely erased, although some may be reduced.
Chapter 13 payment plan may help you manage IRS debt, but not get rid of it completely. Your payment plan will be based on your income, assets, and bankruptcy exemptions.
The court will determine whether your tax debt is a priority or nonpriority. This will determine if and what you have to pay back with past debts.
The payment plan is with the bankruptcy court, not the IRS with a Chapter 13 bankruptcy.
In order to file a Chapter 13 bankruptcy, all required tax returns within the four years of filing must be filed.
Find Out What Happens To Irs Collection Of Tax Debts When You File For Chapter 7 Or Chapter 13 Bankruptcy
By Carron Nicks
A bankruptcy case can wipe out older income tax debt that meets qualification guidelines. It can also give you a way to pay back recently assessed taxes at a payment amount lower than what the IRS would offer. In this article, you’ll learn more about how bankruptcy can help with your IRS debt.
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Chapter 11 Bankruptcy Is Best For Businesses But Individuals Can Also Apply
Whereas Chapter 7 and Chapter 13 bankruptcy are for individuals, Chapter 11 bankruptcy is tailored towards businesses and business owners. It is very similar to chapter 13, as it is also a reorganization plan to pay down creditors over a longer period of time. It is substantially more expensive than Chapter 7 or Chapter 13, as well. Individuals can also file for Chapter 11 bankruptcy and generally do so only when their debt exceeds the limits established by Chapter 13.
You Can Wipe Out Or Discharge Tax Debt By Filing Chapter 7 Bankruptcy Only If All Of The Following Conditions Are Met:
- The debt is federal or state income tax debt. Other taxes, such as fraud penalties or payroll taxes, cannot be eliminated through bankruptcy. In other words, the debt needs to be a regular tax payment that you owed either the State of Wisconsin or the federal government.
- You did not willfully evade paying your taxes or file a fraudulent return. Bankruptcy will not help in these circumstances. Your actions need to have been lawful.
- Your tax debt is at least three years old. The original tax return must have been due at least three years prior in order to effectively file for bankruptcy. So if you were to file for bankruptcy in April 2020, for instance, this would apply to your 2017 taxes that were due April 15, 2018.
- You filed a tax return at least two years before filing for bankruptcy. To eliminate a tax debt, a return for that debt must have been filed. Generally, if your extensions expired and you filed late, you have not filed a true return and will not be able to eliminate the tax debt.
- The tax debt must have been assessed by the IRS 240 or more days before you file for bankruptcy, or must not have been assessed yet. This is called the 240 day rule. If the IRS suspended collection efforts due to a compromise or previous filing, this deadline may be extended.
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How Do You File Your Taxes After A Chapter 7 Discharge
Once your bankruptcy case is closed, you can have a fresh start and that still includes filing taxes after Chapter 7 discharge. You are required to report an IRS Form 982 for the tax year when you got your bankruptcy discharge so you can make sure that you dont pay taxes on any forgiven debt during bankruptcy. It will also help in properly allocating any tax attributes.
When Can You Discharge Tax Debt In Bankruptcy
You can discharge tax debt given that specific conditions are met:
- The taxes you are attempting to discharge are income taxes
- You did not commit any form of tax fraud or tax evasion
- Your tax debt is at least three years old
- You filed a tax return for the debt you are attempting to discharge and,
- The IRS has not assessed the outstanding debt in the last 240 days.
If you fail one of the above criteria, your Charlotte bankruptcy attorney may be able to discuss options with you for discharging the debt. While the above rules are general principles and usually enforced, there are exceptions that may prove useful to your particular case.
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