Tax Payment Plans In Chapter 13 Bankruptcy
If you are not eligible for your taxes to be fully discharged in bankruptcy , you may be able to utilize Chapter 13 to do a repayment plan to eliminate the tax and remove the lien. This can enable you to make payments on your tax debts for up to 60 months, while still eliminating other debts for a payment your budget can afford.
The payment plan will usually be at zero percent interest, unless there is a lien against property.
The amount you pay will be based on your budget, and also on the amount owed to the taxing agencies for taxes that are not dischargeable.
Some Good News About Bankruptcy
The IRS considers many types of canceled debt to be taxable income. For example, if you get a credit card issuer to agree to cancel $5,000 of your credit card debt, you might have to count that amount as taxable income when you file your federal income tax return.
However, debt canceled in Chapter 11 bankruptcy is not considered taxable income.
That means if you owed taxes and got them canceled as part of a bankruptcy proceeding, you will not have to report that amount or any of your other debt forgiven by the bankruptcy as taxable income on a future tax return. But you may have to file a form with the IRS to verify that the debt was discharged through bankruptcy and therefore isnt taxable income.
How Will An Automatic Stay Affect Tax Debt
The IRS has some fairly extensive rules on what the automatic stay will and wont do when it comes to your back taxes and their collection actions. As with any other type of debt, bankruptcys automatic stay will prevent most collection actions by the IRS, including:
- Collection letters and balance due notices
- Wage garnishment
- Tax refund offset, where they take your current refund to pay off existing tax debt
- Filing a new Notice of Federal Tax Lien
However, there are other IRS actions that the automatic stay wont prevent or stop. Even after you file for bankruptcy, the IRS can still:
- Do a tax audit to determine your liability
- Issue a notice of deficiency
- Issue a demand for a tax return if you have not filed yet
- Refile a Notice of Federal Tax Lien
- Intercept your tax refund for past-due child or spousal support
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Can I File Bankruptcy On Taxes
Yes. If you have income tax debt, you can declare bankruptcy on taxes owing. In Canada, tax debts are treated the same as any other type of unsecured debt, such as a credit card or a personal line of credit. If you successfully complete a bankruptcy, all tax debt will be cleared. However, filing for bankruptcy is often a last resort for getting out of debt and it may not be your only solution. A Licensed Insolvency Trustee can walk you through your options, so you can determine the best path to take.
Irs Tax Liens And Chapter 7
Even when taxes are discharged it does not eliminate an IRS lien.
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Can You Declare Bankruptcy On Taxes Owing
The short answer, for most people, is yes you can declare bankruptcy on taxes owing. In fact, 50% of the people that file personal bankruptcy include some form of tax debt. It is usually personal income tax, but also includes HST, source deductions, as well as directors liability for corporate tax debts. This applies to people that file bankruptcy and for people that file a consumer proposal. Canadian bankruptcy law doesnt differentiate between tax debts and other kinds of unsecured debt.
The long answer is still yes, you can declare bankruptcy on taxes owing, with the following restrictions:
Both of these things are quite rare you have to go out of your way and deliberately break the law in order for the Canada Revenue Agency to use these tools to collect your taxes.
There are a couple of other things that you need to be aware of, should you file for bankruptcy and have a tax debt.
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.
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Sole Proprietors May Get Help With Personal Debt
While most small business owners will file Chapter 7 bankruptcy, sole proprietors have another option: Chapter 13. With this option, you may be able to list both personal and professional debts in your bankruptcy filing. For example, if you operate your business out of your home, you may be able to include missed rent payments.
Another way Chapter 13 bankruptcy helps sole proprietors is by keeping them in business. You may be able to stay operational as you work down your debt and get out of bankruptcy over time.
Using the home-based business again, it is much harder to liquidate assets as these sole proprietors would have to sell their houses and their cars to pay off debt, leaving them homeless and otherwise unable to work.
However, the combination of your personal and professional finances in Chapter 13 bankruptcy may impact your . Chapter 7 bankruptcy is recorded on your credit report for up to 10 years, while Chapter 13 is reported for up to 7 years.
In some cases, bankruptcy is unavoidable. If you decide that you need to go this route, make sure you know your options. Be informed about the bankruptcy process and the steps you can take to make it go smoother.
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.
Take Your First Step Towards A Debt Free Life
If you are overwhelmed by debt and live in the Toronto area, call us at 416-498-9200 to book a FREE, confidential appointment. We will review your financial situation in detail and discuss all of your options with you. Alternatively, you can fill out the form below and our team will reach out to you.
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Eliminating Tax Debt In Bankruptcy
The following set out the rules to discharge an IRS debt in Bankruptcy:
You can get your IRS transcripts by going to Get Transcript FAQs
When I explain the above mentioned rules to clients they look at me glassy eyed. I dont blame them. The rules are legalistic and confusing.
For 99% plus of clients I have had there are only 3 rules that apply:
The following is an example of the most common situation:
Bankruptcy & Tax Debt
Many people who seek the assistance of a licensed insolvency trustee have substantial unpaid taxes that they owe to the Canada Revenue Agency and they wonder can bankruptcy eliminate tax debt or if the CRA will accept a deal for taxes owed debt.
Need Help Reviewing Your Financial Situation? Contact a Licensed Trustee for a Free Debt Relief Evaluation
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Bankruptcy & Taxes Owing
The goal of the Canada Revenue Agency is to determine and go about collecting the proper amount of taxes from people and companies in the country.
However, based on circumstance or the size of your tax bill, it can happen that you are unable to pay for your tax debt.
- In situations such as these, it is always best to act as soon as possible.
- Generally, when you act more quickly, there are a larger number of options available for you to address your financial concerns.
Need Help Reviewing Your Financial Situation?Contact a Licensed Trustee for a Free Debt Relief Evaluation
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.
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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.
Are You Getting A Refund
Refunds that are issued as a result of returns for years prior to the year of bankruptcy are considered to be the property of the estate in bankruptcy. As a result, these refunds will be sent to the trustee. Any refunds issued in relation to returns for years subsequent to the year of bankruptcy will be sent to you, unless the trustee has obtained a court order.
For the year of bankruptcy, any issued refund related to the pre-bankruptcy return will be sent to the trustee. Issued refunds related to the post-bankruptcy return will also be sent to the trustee if your bankruptcy assignment date is July 7, 2008, or later. Post-bankruptcy refunds that are issued for bankruptcies with an assignment date prior to that will be sent to you, unless the trustee has obtained a court order or has provided us with an Authorization and Direction letter.
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Requirements For Discharge Of Income Taxes In Bankruptcy:
There are several prerequisites that must be met before any income tax can be discharged in bankruptcy.
The minimum requirements for discharging federal or state income taxes are :
There are many exceptions and events which can extend the time periods on the above rules, so you should not conclude without having actual transcripts analyzed by an attorney expert with tax discharge issues that your taxes will or will not be discharged in a case you file.
Even if you cannot get rid of your tax debt fully in a Chapter 7 bankruptcy case, you may be able to discharge some of it, and enter into a more favorable repayment plan for the taxes than you otherwise could outside of bankruptcy in a Chapter 13 or Chapter 11 case.
You Can’t Discharge A Federal Tax Lien
If your taxes qualify for discharge in a Chapter 7 bankruptcy case, your victory may be bittersweet. Why? Bankruptcy won’t wipe out prior recorded tax liens. Chapter 7 bankruptcy will wipe out your personal obligation to pay the qualifying tax and prevent the IRS from going after your bank account or wages. But if the IRS recorded a tax lien on your property before the bankruptcy filing, the lien will remain on the property. You’ll have to pay off the tax lien before selling and transferring the property’s title to a new owner.
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Tax Liens Dont Go Away
Attorneys will often advise clients to wait to file a Chapter 7 case until all or most of their tax debt is dischargeable. For some, this strategy could prove risky.
If your tax debt is high, the IRS might file a tax lien against your property, which can make managing the debt more difficult because the lien will attach to your real and personal property. As a result, even if the tax debt gets wiped out in bankruptcy, youll still have to pay the lien once the property gets sold.
What Happens If I Have Tax Debt That Cant Be Erased Yet
Plenty of taxpayers are in this boat, and they all have several legal options. An attorney can advise you on the best course of action, but ultimately, the decision is yours.
Pay in installments. Some people talk to the IRS about a payment plan. The IRS usually backs off once the taxpayer starts an installment agreement. After all, the IRS just wants the money. It doesn’t really want to garnish your wages. Keep in mind that installment agreements are only a good idea if you have the money. If thatâs not the case, you need another option.
Participate in the Offer in Compromise program. The IRS has many programs to help taxpayers pay their tax debt when they have little or no money. The main example is the Offer in Compromise program where taxpayers pay what they can, and the IRS forgives the rest. This program can be extremely complex, and few people qualify. Also, if the taxpayer has any assets whatsoever the IRS will force the taxpayer to sell them. Finally, while the taxpayer negotiates, the IRSâs harassing collections techniques continue.
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