Does Bankruptcy Clear Irs Debt Or Remove Tax Liens
Does bankruptcy stop tax debt? Well, according to the IRSs own website , you can free yourself from the burden of past-due federal tax debt you cant pay by declaring bankruptcy.
Bankruptcy under Chapter 7 or Chapter 13 of the U.S. Code is available for individuals who have experienced extreme financial hardship, whether from a loss of job, serious injury, illness or other radical change in their lives. In any event, if your income no longer matches your expenses, and subject to certain other qualifying criteria, bankruptcy may be a solid option to get a fresh start. Like most other debts , bankruptcy may provide an escape hatch for the challenges you are facing from unpaid taxes.
The Law Offices of Kretzer and Volberding P.C. have reputable bankruptcy attorneys in Houston that can help you with the process.
Tax Debt In Chapter 7 Bankruptcy
With Chapter 7 bankruptcy, known as straight bankruptcy, things are more straightforward. If you meet the five criteria defined above, then the tax debt gets discharged. The discharge will also include penalties and interest generated by that debt.
If the tax debt doesnt meet those criteria, then it and any penalties generated from it will not be discharged. You can still file for bankruptcy and have your other debts discharged, but you will still owe those taxes and must repay them.
Discharging Tax Debt With Chapter 7 Bankruptcy
Meet the requirements listed above and you may discharge your income tax debts by filing for Chapter 7 bankruptcy.
If you qualify for Chapter 7 bankruptcy, you may eliminate unsecured nonpriority debts such as:
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The Irs Is Forced Into Accepting An Installment Agreement
In a Chapter 13 case, the Debtor can force the IRS into accepting an installment agreement as part of the Chapter 13 re-payment Plan formulated by the Debtor. The Chapter 13 Plan must provide for full payment, in deferred cash payments, of all tax claims entitled to priority under Section 507 of the Bankruptcy Code, unless the taxing entity, such as the IRS, agrees to different treatment.
Discharging A Tax Debt By Filing Chapter 7 Bankruptcy
If all of the following conditions are applicable, you might be able to successfully file Chapter 7 bankruptcy and eliminate federal income tax debts:
- The debts are solely related to income taxes: Any tax debts other than those that arise from income tax cannot be eliminated by filing for Chapter 7 bankruptcy.
- You did not fraudulently file or willfully evade paying your taxes: A fraudulent tax return or an attempt to evade your tax obligation will preclude you from discharging your tax liabilities through Chapter 7 bankruptcy.
- The tax debt must date back at least three years: The tax return in question must have been due at least three years before you filed for Chapter 7 bankruptcy.
- You have filed a federal tax return: With a few rare exceptions, you must have filed a federal tax return for your current tax liability at least three years before filing for bankruptcy.
- Your claim satisfies the 240-day Rule: The IRS must have assessed your income tax liability at least 240 days before you file for Chapter 7 bankruptcy. However, this time limit may vary if collection actions were suspended due to an offer in compromise.
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Bankruptcy Stops Irs Collection Levy And Federal Tax Liens
If the IRS is taking action to collect, then filing bankruptcy provides instant IRS tax debt relief. The bankruptcy code has a provision called the automatic stay under 11 U.S.C. § 362 that protects you and your assets from collection, levy, and federal tax liens the moment your case is filed.
The IRS will not be able to take your wages, liquidate your bank account, or start new collection actions once your bankruptcy case is filed.
In Chapter 7 bankruptcy, the IRS will be stopped from collecting a prior tax debt until your discharge is entered, approximately 3 months after your case is filed. This will give you time to work out a solution for handling any tax debt that may not be discharged in the bankruptcy.
Alternatively, a Chapter 13 bankruptcy will handle all of your tax debt. Your debt will either be discharged or paid completely over the 3-5 years of your Chapter 13 Plan.
See also:Chapter 13 Has Long Term Financial Advantages
Tax Debt And Chapter 7 Options
In a Chapter 7 case, all property owned by a Debtor becomes the property of the bankruptcy estate upon initiation of the case. The Debtor is permitted to keep all exempt property, and all other property is turned over to the Bankruptcy Trustee for sale and distribution of the sale proceeds to Creditors. Debtors with the non-exempt property they desire to retain should file Chapter 13 bankruptcy to preserve their assets as Debtors are permitted to keep all property in a Chapter 13. In Chapter 7, almost all of a Debtors debts are completely eliminated, and the Debtor emerges from Chapter 7 debt free. Certain debts, however, are not dischargeable in bankruptcy, including tax liabilities. Certain tax liabilities, however, may be discharged in bankruptcy.
The above time periods are extended based on certain specific actions such as a prior bankruptcy filing, pending Offer in Compromise, and other limited actions.
TIP: Timing can be important in attempting to discharge old tax liabilities. Consult with a bankruptcy attorney to evaluate the proper time for you to file bankruptcy to enable you to take advantage of the Chapter 7 discharge.
DISCLAIMER
For more information on Tax Debt & Bankruptcy In Utah, a free initial consultation is your next best step. Get the information and legal answers you are seeking by calling 501-0100 today.
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Irs Tax Liens And Chapter 13
The same rules apply. IRS liens can often be avoided in whole or in part depending on the value of the property. If the house is worth less than the mortgage, the IRS lien is not worth anything. The Chapter can get rid of the IRS lien.
For example:
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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The Tax Assessment Was At Least 240 Days Old
Again, this often covers the same ground as the first two rules. The IRS must assess the tax at least 240 days before the taxpayer files for bankruptcy. The IRS assessment can arise from a self-reported balance due , an IRS final determination in an audit, or an IRS proposed assessment that has become final.
In other words, you reported what you owed, or the IRS has officially stated, “This is what you owe.”
Discharge Taxes In Bankruptcy
Income tax debt is common among those who need to file Chapter 7 bankruptcy or Chapter 13 bankruptcy. Did you know that while income tax debt can get discharged in bankruptcy, there are strict and specific rules regarding which past-due income taxes are dischargeable?
The timing of your bankruptcy filing is very important. Read on to find out if your income tax debt can be discharged in bankruptcy, from noted Philadelphia bankruptcy attorney David M. Offen, Esq.
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Filing For Chapter 11 Bankruptcy
Chapter 11 bankruptcy focuses on reorganizing your finances to help you clear debt. This is mainly used by businesses.
This may involve selling some but not all of your assets. So it can help you to hold onto some assets, like your home, while you clear your debt.
Reorganizing your assets means that you will have to put together a payment plan. This doesnt eliminate all of your debt but it does make it more manageable. However, if you dont put together a plan during the filing period then your application will fail.
Bankruptcy And Taxes: Eliminating Tax Debts In Bankruptcy
By FindLaw Staff | Reviewed by Bridget Molitor, J.D. | Last updated April 19, 2021
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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Important Note On Late
Unfortunately, a few courts, including a federal appeals court have held that a tax return filed even a day late is not a tax return for the purpose of the statute allowing discharge of tax debts in bankruptcy. In other words, if your forms were filed late without an extension in any given tax year, you cannot discharge the taxes for that year.
In a Chapter 13 case, the Debtor formulates a plan to re-pay their Creditors over a three to five year period. The Debtor makes a single monthly payment to the Bankruptcy Trustee who distributes the payment among the Debtors Creditors in the manner set forth in the Chapter 13 Plan. Tax debts are generally non-dischargeable in bankruptcy. However, Chapter 13 can offer significant benefits in dealing with taxing entities.
How Do You File For Bankruptcy
If you have tax debts that are impossible to pay-off, then filing for bankruptcy can be your only way to gain a sense of financial freedom.
The best way to do this is through a debt relief service like the one we offer.
You will have a guide that can take you through the entire legal process and help with any issues along the way.
For tax debts, there are a few things to bear in mind before you file:
- Ensure you have all of your tax returns filed and ready, this confirms that you owe money to the CRA, and how significant your debts are.
- Do you have any liens on your assets? A lien is basically a legal right or claim against an asset. In effect, the CRA may claim your house or car as collateral to satisfy a debt. If these exist, then they are impossible to remove. So, bankruptcy can remove your tax debts, but you wouldnt get to keep the asset that the lien is attached to.
You will discuss all of these things with a Licensed Insolvency Trustee , who will offer advice on debt relief and aid with your bankruptcy claim.
Never accept any advice from someone who isnt an LIT.
LITs are federally regulated to ensure you get fair and professional advice.
Should you file bankruptcy for tax debts?
In some cases, this can be the quickest and cheapest way of getting rid of your tax debts.
It is generally considered to be a last-ditch scenario when all other options have been considered.
Becoming bankrupt will give you a fresh start, but its a very serious thing to go through.
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Mapping Personal Bankruptcy In The Us
There are over 750,000 bankruptcy filings in the U.S. every year, and over 61% of those are fast-exit Chapter 7 filings. That means over 450,000 Americans are getting a fresh start in about six months or less each year by making the decision to file. This map also shows how many residents have filed for bankruptcy and the percentage of Chapter 7 versus Chapter 13 filings in each state. This can help set your expectations for what you can expect once you make the decision to file.
Learn More By Contacting An Attorney
If you are facing bankruptcy proceedings and need the services of an experienced attorney to help you correctly file your bankruptcy paperwork and deftly navigate the court system, contact the Law Office of Rebecca L. Evans today at or reach out to us online to schedule your consultation. From our office in Springfield, we help people throughout Northern Virginia.
For our clients benefit, we are considered to be a debt relief agency because we help people file for bankruptcy relief under the Bankruptcy Code.
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Eligibility Requirements To File Chapter 7 Bankruptcy
There are certain eligibility restrictions and requirements individuals must meet in order to file for Chapter 7 bankruptcy. For instance, if you have received a bankruptcy discharge within the last 6-8 years, you are likely ineligible to file Chapter 7. You also wont be eligible to file Chapter 7 if you have had a Chapter 7 or 13 case dismissed within the previous 180 days due to violating a court order, or if a court has determined that you fraudulently filed for bankruptcy in the past.
Additionally, if your monthly income exceeds the median income for a household of your size within your state, you are not eligible unless you complete the Means Test, which measures your disposable income and determines the amount of your debt that the government believes you could reasonably repay over a five-year repayment period.
Lastly, your bankruptcy claim could be dismissed if the court believes that you have attempted to deceive or cheat your creditors, or that you have concealed your assets to protect your property. Actions and behaviors that will raise the suspicion of the court may include:
- Transferring assets to friends and family
- Maximizing debts when it was clear that you were incapable of repayment
- Hiding assets or money during a divorce
- Lying or failing to disclose accurate information concerning debts and income on a credit application
Can You File Chapter 7 Against The Irs
One of the most common questions we get is can you file chapter 7 against the IRS, and the answer is often yes. To be able to discharge federal income tax debt, you must qualify based on the conditions mentioned above.
While you can file Chapter 7 for income tax debt, the same strategy will not work for payroll taxes. Additionally, rules on previously unfiled tax returns are not uniform and newer liabilities are unable to be resolved. A Chapter 7 bankruptcy cannot discharge tax liens recorded before filing.
Under this chapter, the debtor will receive an absolute right to discharge all of the debts that are included as part of the bankruptcy. However, taxpayers will not receive an absolute discharge for their tax debts. The following tax debts will not be discharged in a Chapter 7 bankruptcy:
- Tax debts for which no original returns were filed by the taxpayer
- Tax debts for which a return was filed within 2 years of the bankruptcy petition
- Tax debts based on returns that were fraudulently filed
- Tax balances that arose because a taxpayer was found to have willfully attempted to evade their tax responsibility
Other tax debts, including assessed penalties are dischargeable unless the event that gives rise to the penalty occurred within 3 years of the bankruptcy or relates to an underlying tax balance that is not dischargeable.
Chapter 7 is not the only way to handle bankruptcy and taxes with the IRS, so you should consider other chapters before filing.
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Puerto Rico Bankruptcy Judge Set To Approve Modified Debt Plan
Michelle Kaske, Bloomberg News
Residential buildings in the Miramar neighborhood of Santurce, San Juan, Puerto Rico, on Tuesday, Nov. 16, 2021. Digital currency enthusiasts are now seeking residence on Puerto Rico’s north shore to reap huge tax savings. Photographer: Xavier Garcia/Bloomberg , Bloomberg
— The judge overseeing Puerto Ricos bankruptcy directed the islands financial oversight board to revise its debt-restructuring deal by Friday and plans to confirm that workout plan soon after.
U.S. District Court Judge Laura Taylor Swain detailed changes she wants the board to make to the debt adjustment plan and submit the revised version by Friday, 11:59 p.m. Atlantic Standard Time, which is 10:59 p.m. Eastern Standard Time, according to an order filed late Monday.
It could mean that Puerto Ricos more than four-year bankruptcy process, the largest ever in the $4 trillion municipal-bond market, may finally begin to wind down this month. Once the board files the revised plan on Friday, Swain would then promptly submit her confirmation order approving the debt restructuring plan, according to the judges order.
The oversight board is reviewing Swains order and intends to file the revised debt plan by Friday, Matthias Rieker, spokesperson for the board, said in a statement Monday following Swains order.
Tax Debts In Each Chapter
Tax debts are typically priority debts in all chapter filings. They’re addressed and paid first when assets are liquidated in Chapter 7, and they must be included and paid in full in Chapter 12 and 13 payment plans.
Priority tax debts are not dischargeable in Chapters 11, 12, or 13.
You can receive tax refunds while under bankruptcy protection, but they will most likely be directed toward paying your tax debts.
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