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Does Filing Bankruptcy Get Rid Of Tax Debt

What Are The Options For Individual Bankruptcy

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Most individuals will file for bankruptcy protections under Chapter 7 or Chapter 13 of the Bankruptcy Code. Chapter 7 is generally utilized by people with limited incomes who do not have the ability to pay back all or a certain portion of their debts. The court will appoint a trustee to organize and prioritize the debts, take an inventory of the debtors property, and sell certain qualified property to pay at least some of the debt.

Chapter 13 bankruptcy is referred to as a reorganization bankruptcy. Property is not sold when you file for Chapter 13 protection. If you successfully complete a court approved repayment plan, you may be able to keep some, if not all, of your property. With both types of bankruptcy, if you follow court orders and make payments when directed, at the end of the process all unsecured debts are discharged . But not all debts are dischargeable.

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.

Bankruptcy And Taxes: What You Should Know

If youre struggling to stay financially afloat with various creditors as well as the government, youre probably starting to wonder: does filing personal bankruptcy eliminate tax debt?

As weve already covered, for the vast majority of filers, Chapter 7 will be the best bet to try and get at least a portion of your tax debt wiped out. However, you should approach your situation with realistic expectations and your eyes wide open: many people are not able to get their tax debts erased in a Chapter 7 bankruptcy, and for those who do find relief in Chapter 7, it is almost always for a portion of the tax debt not the entire amount.

Ready to see if you might qualify to have some tax debt wiped out in Chapter 7 bankruptcy? Lets take a look at a few of the most important qualifications to get that monetary amount included in your discharges.

#1 What is the nature of the unpaid tax debt?

As weve said, only income tax debt is even eligible for a chance at discharge . If your owed amount is related to payroll taxes or the result of a bad faith or fraudulent action on your part , you will be stuck with that burden even if you file for Chapter 7. Income taxes, and income taxes alone, are the specific type of tax debt with a little bit of wiggle room when you file for bankruptcy under Chapter 7.

#2 How old is the unpaid tax debt?

#3 Did you file a fraudulent tax return or commit willful evasion?

#4 Did you file an on-time tax return for the year in question?

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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

When You Can Wipe Out A Tax Debt

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You can discharge debts for income and/or general excise taxes under Chapter 7 and Chapter 13 bankruptcy only if you are able to meet all the following conditions:

Tax is Income Tax or General Excise Tax

Tax other than income or general excise tax, such as fraud penalties and payroll taxes, cant be wiped out in bankruptcy. So, if you want to get rid of income or general excise tax, then there are possibilities for you to become debt-free.

You Didnt Commit Willful or Fraud Evasion

If you filed a deceitful tax return or willfully tried to avoid paying taxes, like using a wrong Social Security number on your tax return, then bankruptcy cannot help you at all.

The Debt is at Least 3 Years Old

In order to get rid of tax debt, your tax return needs to have been due at least 3 years before you file for bankruptcy.

You Filed a Tax Return

Youd need to file a tax return for the debt you want to wipe out at least 2 years before filing the case.

You Must Qualify For the 240-Day Rule

The income tax debt needs to be assessed by the taxing entity at least 240 days before filing for the bankruptcy.

To learn more about the requirements for getting rid of income tax and general excise tax debt, our seasoned bankruptcy lawyers have over 30 years of experience in this area. Our highly experienced attorneys will explain the whole process to you and provide the best solution for your case.

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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.

Can The Bankruptcy Court Lower Child Support Payments

No, the bankruptcy court cannot lower child support payments. The bankruptcy court does not have the ability to determine child support payments. Only the family court can determine child support payments. Even though the bankruptcy court can grant a discharge of certain types of debts, they cant decide that a child support award is inappropriate or change it.

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Every Situation Is Different

Bankruptcy is sometimes referred to as an insolvency solution. Insolvency is defined as the inability to pay your bills as they become due, because of lack of funds. There are many insolvency solutions in Canada, including bankruptcy, consumer proposal, and .

As an example, a person with a high income may be able to service $100,000 in debts without any problems. Their income is preventing them from becoming insolvent, despite the high payments they must make on their debts.

Another person, this one with a lower income and higher expenses, perhaps due to a larger family, may have great difficulty servicing a mere $10,000 in debts. The bills are comparatively small, but they are piling up unpaid, and creditors may be calling.

This second individual, with the lower debts, may be a candidate for bankruptcy and the protection it offers, while the person with higher debts may be able to service them on their own.

So, the qualification for bankruptcy depends on a lot more than the mere amount of debt.

Conversely, even if the amount you owe is equal or greater than the minimum amount of debt required by the law for filing bankruptcy in Canada, and you are having difficulty paying your bills, that does not necessarily mean that you are facing bankruptcy.

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Considering Bankruptcy To Get Rid Of Your Back Taxes 3 Alternatives To Explore Before You File

Can I Get Rid of My Tax Debt with Bankruptcy?

If you are drowning in debt and working harder and harder to make ends meet, you may think a bankruptcy filing is the only way out, but that is not necessarily the case. Filing for bankruptcy is one solution, but it is a drastic step that should only be taken as a last resort.

This is especially true if you owe back taxes to the IRS or state. Depending on what type of taxes you owe, you might not be able to wipe out your back taxes in bankruptcy proceedings.

Its important to weigh all your options and get a clear picture of your financial situation, so in this article, we share with you 3 smart steps to take before declaring bankruptcy.

Depending on how much you owe, who your creditors are, and how the rest of your financial life looks, you may be able to dig yourself out of the hole and take back control without having to declare bankruptcy. Here are three smart alternatives to consider before calling a bankruptcy attorney.

3 Alternatives to Explore Before You File

1. Contact A Tax Relief Firm

Most bankruptcy attorneys arent familiar with the complex tax laws so they wont accurately be able to assess your tax situation.

A tax relief firm like ours can help you assess your back tax situation and often help you settle your back tax debt with the IRS. If you owe a substantial amount of back taxes, this may be a good way to reduce your overall debt burden. This can also be a good first step to getting back on track with your finances.

3. Refinance Your Debt

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What If I Cannot Reach An Agreement With Cra

A consumer proposal gives you a chance to repay a portion of your debts over a period of time, and if accepted, the CRA will not be able to prevent your tax debt being included in the proposal.

A bankruptcy can also wipe out tax debts and give you a fresh financial start.

If you owe tax debt and are unable to negotiate with the CRA we can help you deal with your CRA tax debt.

When you declare bankruptcy you can include your tax obligations as debt in the bankruptcy.

Income tax debt & CRA debt can be wiped out when going bankrupt as it is an unsecured debt.

Penalties and interest charges can also be discharged by going bankrupt.

If you decide to declare bankruptcy, your trustee will help you with your tax returns.

If you file a consumer proposal you can also clear tax liens owed to the government.

Need Help Reviewing Your Financial Situation? Contact a Licensed Trustee for a Free Debt Relief Evaluation

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.

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Payment Plans Or Offer In Compromise

Rather than enter your tax debt into a bankruptcy filing, the IRS provides alternatives that some find to be more desirable. One of these is setting up a payment plan with the IRS for your unpaid taxes. A payment plan is a private agreement which is a legal and binding contract between you and the IRS in which you agree to pay your back taxes in a certain amount within a certain window of time.

There are immediate, short term and long term payment plans available with the IRS, all with different administrative charges attached to them. As may be expected, the sooner you pay in full, the less interest and charges accrue.

Another alternative is an offer in compromise with the IRS. This is a negotiated settlement or deal you make with the IRS for less than the full amount of taxes owed. The IRS will consider such factors as your income, assets, ability to pay, and other fixed expenses when determining a settlement figure. Note that you cannot pursue this option if you are engaged in a bankruptcy proceeding.

In the end, the value of agreements with the IRS for repayment plans and offers in compromise, within the bankruptcy context, depends on how much debt you owe overall and what percentage of it is owed for taxes. The more your debts are IRS debts, rather than consumer debts, the better off you will likely do working with the IRS directly to take advantage of one of these alternatives.

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Is Child Support Debt Erased By Bankruptcy

Getting Rid of Your Debts

No, child support debt is not affected by filing for bankruptcy. A debtor cannot avoid a child support obligation by filing for bankruptcy. Instead, the entire amount of the debt continues to be valid until its fully satisfied. The paying parent must make arrangements to pay the full amount of the debt. A bankruptcy court has no authority to suspend child support payments.

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Back Taxes And Bankruptcy

With the recent hardships induced by COVID-19 and the social distancing procedures, many industries have suffered. Restaurants, various services, and airlines have all had to layoff large portions of their staff. Inevitably, a significant number of Americans will have to file for bankruptcy while owing back taxes.

Despite the negative stigma often associated with bankruptcy, it is actually a worthy part of our legal system. Bankruptcy provides many benefits to individuals and society be it a fresh start to debtors or keeping families together.

Nevertheless, those who have to file for bankruptcy are most likely wondering, can I file for bankruptcy if I owe back taxes to the IRS?

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How Does Declaring Bankruptcy Work

I asked Howard Dvorkin, chairman and CEO of Debt.com, to help me figure it out. He told me that bankruptcy is a way for people to get rid of their debt and start fresh when all else fails. Thats how the Supreme Court described it in a 1934 opinion, saying bankruptcy gives the honest but unfortunate debtor an opportunity to thrive unhampered by the pressure and discouragement of pre-existing debt.

Declaring bankruptcy isnt super common. In 2020, only about 523,000 people did so the lowest number of filings since 1986, and down from 752,000 the year before.

There are two primary types of personal bankruptcy: Chapter 7 and Chapter 13. Dvorkin says Chapter 7 is what most people think of when they imagine bankruptcy, where the court sells some of my assets to pay off my debts. Chapter 13, on the other hand, is more of a reorganization where I repay some of what I owe through a court-ordered plan.

Chapter 7 is largely for low-income people. Its fast, taking about 120 days compared to Chapter 13, which can take up to five years.

Both types get rid of unsecured debt, which includes credit card debt and medical bills but usually not student loans or back taxes, according to Sheereen Middleton, a bankruptcy attorney in Maryland. Bankruptcy can be a strategic move to eliminate that debt, which would then leave you with a favorable debt-to-income ratio, she adds.

Its something where it can literally change your life, Middleton says.

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Tax Returns And Chapter 7 Bankruptcy

When you file for Chapter 7 bankruptcy, the trustee assigned to oversee your case will ask for your most recently filed tax return. That doesn’t necessarily have to be the tax return for the last tax year, but if it isn’t the most recent return, the trustee will ask for a written explanation.

The trustee will compare the income you report on your return to the amount listed in your bankruptcy paperwork. If you show that you’re due a refund, the trustee will also want to check that you have the right to protect it and that you’ve claimed the proper exemption amount. If not, you’d be required to turn the refund over to the trustee, who would, in turn, distribute it to your creditors.

Many people plan to use the return for necessary itemssuch as living expensesbefore filing a bankruptcy case. If you choose this approach, it’s a good idea to keep records of your expenditures.

You Can’t Discharge A Federal Tax Lien

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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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