Debts That Cannot Be Discharged In Bankruptcy
Some debts cannot be discharged in bankruptcy. There is a common myth that if you declare bankruptcy, all of your debts magically go away. Not only is this inaccurate, but bankruptcy also may not be your best option for debt relief. Before deciding on how to deal with creditors and unpaid bills, its essential to understand what debts you can include in bankruptcy, and which ones arent. Knowing this will help you settle on a debt recovery solution thats right for you.
Accruing New Debt Under Bankruptcy
One of the provisions of a bankruptcy is that the debtor may not acquire any other delinquent balances while under the courts supervision. Barger said taxes may be defined as new debt if a person is unable to pay them. That can either force the court to dismiss or convert the current bankruptcy.
New debt that a person acquires while already in a bankruptcy is not protected from collection by the bankruptcy court, because it was not disclosed in the initial filing, Barger said.
In a Chapter 11 or Chapter 13 filing, both of which stretch over a period of time, the failure to file taxes or to keep current on new tax payments can result in a conversion of the bankruptcy to a Chapter 7 unless the case is dismissed entirely, Archer said.
Chapter 7 bankruptcies are much more brutal than 11s or 13s because they will liquidate all non-exempt assets to pay creditors,” he said. ” 11s and 13s are more like court-brokered negotiations.
In a Chapter 7 case, Archer explained, the failure to pay post-petition taxes will affect neither the bankruptcy nor the tax debt.
The debt isn’t discharged in the bankruptcy case, and the bankruptcy code prohibits filing for a Chapter 7 bankruptcy more than once every eight years, he said. So that debt wouldn’t be going anywhere.
Business Taxes In Bankruptcy
Income taxes that you incur personally as a result of operating a business are dischargeable in bankruptcy under the 3-2-240 rules. However, different rules apply to other business-related taxes:
Payroll Trust Fund Taxes. Trust fund taxes are not dischargeable in bankruptcy. Trust fund taxes include payroll taxes that employer withholds from an employee’s pay on behalf of the government. If you fail to withhold required taxes or withhold the taxes from an employee’s check but fail to pay the withheld funds to the taxing authority, the taxes are not dischargeable.
Employer’s Portion of the Payroll Tax. The employer’s part of the payroll tax is dischargeable in bankruptcy under rules similar to the 3-2-240 rules. The debtor must file for bankruptcy a minimum of three years from the date that the IRS 941 form was due and two years from the date the debtor filed the tax forms.
Sales Tax. Like other trust fund taxes, sales taxes are not dischargeable in bankruptcy in Pennsylvania.
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Debts That Are Difficult To Discharge In Bankruptcy
Student loans are notoriously difficult to discharge through bankruptcy it is only possible if you can demonstrate undue hardship to yourself or your dependents, such as being unable to maintain a minimal standard of living. In some cases, a court may discharge part, but not all, of your student loan debt. If student loan debt is a major reason for your considering bankruptcy, contact your loan servicer first and see if itâs possible to negotiate a repayment plan that would work for you. In the case of federal student loans, for example, several repayment plans are available.
You cannot have income tax debts discharged without a special exemption, which can only be obtained by petitioning the bankruptcy court and explaining why you deserve relief. So if you have income tax debts that you cannot repay, then you may be better off consulting with a tax attorney to discuss your options before filing for bankruptcy.
In the case of federal taxes, for example, the Internal Revenue Service can offer several alternatives to people who are unable to pay what they owe. One is an offer in compromise, in which the IRS agrees to accept a lesser amount. The IRS may also arrange for a payment plan, or an installment agreement, that will allow you to pay your taxes over an extended period of time.
Managing Tax With Chapter 13 Bankruptcy
Filing your tax return might not be as burdensome once you realize that using Chapter 13 bankruptcy to manage your tax debt can be a smart move. Here’s why:
- Dischargeable taxes might be forgiven without any payment at all, depending on the amount of disposable income you have after your reasonable and necessary expenses are deducted from your pay.
- Dischargeable taxes won’t incur additional interest or penalties .
- You can satisfy an IRS tax lien through the Chapter 13 plan.
- The IRS is obligated to abide by the plan as long as you include all your outstanding income tax and keep your tax returns and post-petition tax obligations current during your Chapter 13 plan.
Bear in mind that any nondischargeable tax that won’t go away in bankruptcy must be paid in full during the three- to five-year Chapter 13 plan. When it’s over, you’ll be caught up on taxes and most or all of your other debts.
Unlike Chapter 7, in Chapter 13, you can discharge a credit card balance incurred due to paying off a nondischargeable tax debt. Learn more about tax debts in Chapter 13.
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Effect Of Chapter 13 On Bankruptcy
In a Chapter 13 bankruptcy case, you will have to repay taxes, but how much you repay depends on the classification of the tax debt as either a priority claim or a non-priority unsecured claim. Priority tax debts include recent property taxes, taxes that you are required to collect or withhold , employment taxes, excise taxes, and non-punitive tax penalties. Priority tax debts must be paid in full, but most bankruptcy filers only pay a portion of non-priority unsecured claims, which may include some tax debts. Once the bankruptcy court approves your debt payment plan, the IRS cannot object to your payment plan. This means you can repay priority tax debts at an interest rate of 0%, which is usually more favorable than the deals you can strike directly with the IRS.
Non-priority unsecured claims must be paid only after priority and secured claims are fully paid. In most cases, you only pay a percentage of the unsecured debt, and this percentage is calculated by looking at the value of your nonexempt assets. A tax debt is non-priority and unsecured if it is income tax that meets the five conditions described above.
Do The Courts Ever Deny A Chapter 7 Bankruptcy
It can happen. Most individual debtors receive a discharge under Chapter 7.
However, if the courts find that an individual concealed money or other assets, fraudulently transferred assets that should have been used to pay off debts, or otherwise broke the law, the entire bankruptcy case may be denied.
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Nondischargeable Income Tax Debt In Chapter 7 Bankruptcy
Many debts get wiped out in Chapter 7, but not all. Income tax debt is considered a vital debt that a debtor should repay, so it’s classified as a nondischargeable priority debt.
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.
Tax Return Filing Requirements
Although youve filed for bankruptcy, you still have to file your tax returns.
- Personal: You are still required to file personal income tax returns after filing for bankruptcy. Your bankruptcy representative may also be required to file estate fiduciary tax returns.
- Business: The business is still required to file tax returns after filing for bankruptcy. If the court appoints a trustee, the trustee will file the required tax returns.
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Debts Never Discharged In Bankruptcy
While the goal of both Chapter 7 and Chapter 13 bankruptcy is to put your debts behind you so that you can move on with your life, not all debts are eligible for discharge.
The U.S. Bankruptcy Code lists 19 different categories of debts that cannot be discharged in Chapter 7, Chapter 13, or Chapter 12 . While the specifics vary somewhat among the different chapters, the most common examples of non-dischargeable debts are:
- Alimony and child support.
- Certain unpaid taxes, such as tax liens. However, some federal, state, and local taxes may be eligible for discharge if they date back several years.
- Debts for willful and malicious injury to another person or property. âWillful and maliciousâ here means deliberate and without just cause. In Chapter 13 bankruptcy, this applies only to injury to people debts for property damage may be discharged.
- Debts for death or personal injury caused by the debtorâs operation of a motor vehicle while intoxicated from alcohol or impaired by other substances.
- Debts that you failed to list in your bankruptcy filing.
If You Declare Bankruptcy Do You Still Owe The Cra
Owing money to the CRA can be stressful. There are many ways you can wind up in tax debt, such as not filing your personal income tax returns, failing to pay taxes on business income, HST payments for the self-employed, or inadequate payroll deductions from your employer if you work multiple jobs.
When you owe the CRA money, they charge penalties and interest on unpaid amounts. There is a late filing penalty of 5% plus 1% of your balance owing each month, and the penalty increases if you repeatedly fail to report income. Once you start owing money, it starts to grow, and theres no hiding from it.
If youre afraid that you are going to owe the government money, dont delay filing your taxes. You will only incur harsher penalties and wind up owing more in the end.
The Canada Revenue Agency can garnish your wages, seize your bank accounts, or even register a lien on your home. Given the broad collection powers available to the agency, the sooner you can act on CRA debt, the better. Fortunately, filing bankruptcy or a consumer proposal can stop CRA collection actions.
A common question we hear at David Sklar & Associates is does bankruptcy cover tax debt in Canada? When you , you can include tax debt, but its not the only way to fix the problem! A consumer proposal provides debt relief from unsecured creditors and includes debt forgiveness from CRA as well.
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What Can I Keep In Bankruptcy
In addition to minimum amounts of home or auto equity, the following is a list of assets that are generally exempt from bankruptcy. After all, the process does not intend to take away a persons dignity. Instead, its to help them recover from extreme financial hardship. Keep in mind, the rules surrounding these items can vary from province to province.
- Food & Clothing
Negotiating With Revenue Canada
The first step you should take when dealing with Canada Revenue Agency debt is to contact your nearest CRA office.
You will have to explain your financial situation and why you cannot pay your taxes as owed.
When negotiating with CRA you can offer to pay the taxes you owe in installment payments over a period of time.
If you owe $1,000 in taxes that you are unable to repay you can offer to pay $100 a month for 10 months, plus any interest charges or penalties the CRA might impose.
Of course, whether the CRA will accept your offer is up to them, and they might not accept your offer and take additional action against you for collecting on the taxes owed to them.
Even if your offer is accepted, the CRA will continue to charge you interest until your taxes are paid in full, and the CRA might withhold your child tax credits or GST credits until you have repaid your tax debt fully.
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Property Tax Foreclosure Is Not Usually The More Pressing Concern
If you have fallen a year behind on your property taxes, you likely have quite a bit of time before you would lose the property to a property tax foreclosure. If the documents you received dont make perfectly clear how long you have, be sure to find out from an attorney.
But assuming you have a mortgage, almost always your bigger and more immediate problem is how your mortgage lender will react to you falling behind on your property taxes. Thats because almost always not being current on your home property taxes is a violation of the terms of your mortgage, giving your mortgage lender those independent grounds for it to foreclose on your home. A mortgage lenders foreclosure would likely happen long before a foreclosure by the county
Special Rules For Student Loans
Special rules apply to other types of government debt as well. For example, student loan debt isnât usually dischargeable during Chapter 7. Debtors must usually show undue hardship to discharge their education debt. Undue hardship means different things in different parts of the country because the Supreme Court has not ruled on this issue.
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Prince Edward Island Bankruptcy Exemptions
On Prince Edward Island, property exempt from seizure in bankruptcy is set by the provincial government and applies to the equity in an asset. Equity is the difference between the value of the asset and what you owe on the asset.
Example: If you have a car worth $6,000 and you still owe $3,000 on the loan, the equity you have in the car is $3,000. In P.E.I., the exemption for a car is $6,500. In this case, you are entitled to keep the car and the creditors included in your bankruptcy claim cannot take it from you.
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Bankruptcy Is Supposed To Help You Get A Fresh Start When You Have Too Much Debt But It Will Affect Far More Than Just Your Credit Scores
There are different types of bankruptcy called chapters and the type of debt you have can influence the chapter you need to file, and how your bankruptcy case will progress. In some cases, the bankruptcy court may require you to sell your assets in order to pay part of your debt. Or, the court may make a payment arrangement for you to pay off creditors over several years before the remaining balance of your debt can be discharged.
If your debts include tax debt, you may be able to get it discharged, depending on the type of tax debt.
Because laws related to bankruptcy and taxes are both complicated, its important that you understand before you file for bankruptcy how it will affect past tax debt as well as future obligations to the IRS. Its best to consult with a lawyer before making any decisions about bankruptcy . But this guide can help you learn a little more about how bankruptcy can affect your taxes during and after filing.
Filing Taxes After Filing For Bankruptcy
OVERVIEW
Filing an income tax return after filing for bankruptcy does not have to be a problem, as long as you know what to watch out for, including when and how to file.
For information on the third coronavirus relief package, please visit our American Rescue Plan: What Does it Mean for You and a Third Stimulus Check blog post.
Is there life after bankruptcy? Absolutely, and it includes taxes. Filing an income tax return after filing for bankruptcy does not have to be a problem, as long as you know what to watch out for, including when and how to file.
People that file bankruptcy have to make sure that there are a few things taken care of when it comes to filing their taxes, said Joshua S. Barger, vice president of tax services at Foundation Financial Group in Jacksonville, Florida.
According to IRS Publication 908, Bankruptcy Tax Guide, the Bankruptcy Code requires a debtor to file an individual tax return, or request an extension. If this does not happen, the bankruptcy case can be converted or dismissed. In addition, the bankruptcy trustee is required to file a tax return for estates and trust, Form 1041, for the bankruptcy estate.
No matter what time of year it is, the filing deadline can seem too close for comfort — especially if you are filing or considering filing for bankruptcy. With a little planning and preparation, you will at least know what to do to minimize your stress.
– Joshua S. Barger, vice president of tax services, Foundation Financial Group
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