What Is A Chapter 7 Bankruptcy
Chapter 7 of the Bankruptcy Code is referred to as the âliquidationâ chapter of bankruptcy because a Chapter 7 trustee can sell some property to pay debts. Instead of proposing a bankruptcy repayment plan as required in Chapter 13 bankruptcy, the filer surrenders any property that canât be protected by the bankruptcy exemptions to the bankruptcy estate.
However, federal bankruptcy exemptions or state bankruptcy exemptions protect most of your day-to-day property. Exempt property canât be used to pay your creditors. Thatâs why most Chapter 7 cases filed in the United States are no-asset Chapter 7 cases. In a no-asset case, the debtor keeps all his or her property while getting a fresh start by becoming debt-free. No-asset cases that donât require a full means test analysis can be done on your own through a free bankruptcy nonprofit, Upsolve, or with the help of a legal aid attorney.
Put An Experienced Tax Debt Bankruptcy Attorney To Work In Your Case
If you are faced with a tax lien, you are likely worried about losing your hard-earned assets. My legal team and I have the skills and experience level to help you navigate through the bankruptcy system, while negotiating to have any tax liens removed.
Before becoming a ;tax attorney, I worked for nine years as an auditor in public accounting. I then gained a masters degree in taxation and became a Certified Public Accountant . I work directly with;tax attorney John A. Harbin, who is particularly skilled in tax bankruptcy. He has handled more than 500 tax-motivated bankruptcies in federal tax court, district bankruptcy courts, and before the state of California Administrative Appeals Board. As a legal team, we have the skills and experience level to help you determine if filing for Chapter 7, Chapter 13 or Chapter 11 bankruptcy is the right solution for you.
File A Consumer Proposal
A full discussion on consumer proposals can be found on our page What is a Consumer Proposal. In general terms, a consumer proposal has these features:
In cases where more than 50% of your total debt is debt you owe to the CRA, the CRA will have the majority of the vote on whether to accept your consumer proposal. They will require that:
- All outstanding income tax returns are filed before they will accept the proposal.
- You agree to remit monthly instalments or have additional income tax withheld at source to stay current with your ongoing income tax obligations.
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Chapter 13 Bankruptcy Tax Relief
If you do not qualify for Chapter 7 bankruptcy, you may be able to find tax debt relief through Chapter 13 bankruptcy. In Chapter 13 bankruptcy, you will be responsible for paying the majority of your secured and your non-dischargeable taxes through a repayment plan that you can comfortably afford. Often times, the repayment plan will not require you to pay some or even all of your dischargeable taxes and tax penalties.
If you are paying medical bills, credit cards, or other unsecured debts through the repayment plan, you will pay taxes at the same percentage. For example, if you are paying your medical bills and credit card debt at 5 percent, your taxes will also be paid at 5 percent, meaning you will probably save a significant amount of money on your tax debts.
Can You File Bankruptcy On Taxes
Yes, you can file bankruptcy to resolve back taxes, but not for all of your tax debts. Every chapter has a different set of requirements and processes. Chapter 7 is often a saving grace for anyone in over their head with insolvency because it completely eliminates all dischargeable back tax debts. This strategy is used for those who are unable to pay back income tax debt; however, it is more difficult to get approved for than the other chapters of bankruptcy.
While you can file Chapter 7 for income tax debt, the same strategy will not work for payroll taxes. In addition, rules on previously unfiled tax returns are not uniform and newer liabilities are unable to be resolved. Chapter 7 is not the only way to handle bankruptcy and taxes with IRS, and you should consider other chapters before filing. Learning more about the different chapters of bankruptcy will help you determine which type can help you in your circumstances.
Also Check: What Is Bankruptcy And Insolvency Act
How To Avoid Future Tax Debt Problems
To avoid debt problems in the future, it is important that you understand how you arrived at your current situation, in which you owe a great deal of money to Canada Revenue Agency.
Do you owe taxes because you cashed in the last of your RRSPs to pay your debts? This cant happen again soon, because any remaining RRSPs will be liquidated in your bankruptcy.
On the other hand, if you are self-employed, you can easily find yourself with a tax debt at the end of the year. It is important to prepare for such an eventuality and to make sure that you make payments throughout the year.
We recommend that at the beginning of each year, self-employed individuals estimate the amount of income taxes they will owe and then remit one twelfth of this amount to the tax authorities even if the tax authorities do not require such frequent payments. Then, at the end of the year, tax time will actually be enjoyable as you will have minimal or no accumulated income tax debt. You might even receive a refund!
Finally, make sure you have realistic expectations concerning your lifestyle and your expenses . When do we accumulate tax debt? When we dont feel we can afford to pay it. Proper budgeting and business management can eliminate the monthly deficit that often contributes to serious tax arrears.
When Is A Debt A Claim In Bankruptcy Law
First, let us take a quick look at the purpose of the Bankruptcy and Insolvency Act . The purpose of bankruptcy is to allow an honest but unfortunate debtor a fresh start.; That means, once discharged, a bankrupt should be free of all claims owing by them when they file bankruptcy.
The BIA defines claims or debts provable in bankruptcy.
Section 121 says, All debts and liabilities, present or future, to which the bankrupt is subject on the day on which the bankrupt becomes bankrupt or to which the bankrupt may become subject before the bankrupts discharge by reason of any obligation incurred before the day on which the bankrupt becomes bankrupt.
The key here is that the debt can have a future component, but you must have somehow become obligated to pay that debt before the day you file insolvency.
You are not necessarily free of all claims against you once you file a bankruptcy or consumer proposal. Some debts survive the process. Amounts owing to a secured creditor where you are not surrendering the asset as part of the proceedings remains payable after you file. A few unsecured debts are not eligible for discharge under the BIA, such as fines, support payments, and debt due to fraud, to name a few.
However, subject to the above exceptions, as long as there was a legal obligation that created the potential debt as of the date of bankruptcy, it is eliminated through bankruptcy.
Other times, the concept of when, or if, a debt is created can be a little more complicated.
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Tax Bankruptcy Discharge Rules
There are specific rules that need to be followed in order to have a tax debt discharged in your bankruptcy. The rules for discharging tax debt are as follows:
- The tax debt must be 3 years old,
- The tax return must have been filed two years before you file bankruptcy, and
- The IRS must assess the tax debt 8 months before you file for bankruptcy.
If you meet all of the rules above, then your tax debt is generally dischargeable in Chapter 7, 11, and 13 of the bankruptcy code under 11 U.S.C. § 523. However, calculating the dates for each of the rules above can be tricky and hiring an experienced bankruptcy attorney will help ensure that appropriate deadlines are met.
It is important to note that filing fraudulent returns or willfully evading taxes could give the IRS the ability to argue that your IRS debt should not be discharged. However, merely failing to pay your taxes is insufficient to trigger this exception due to the case Dalton v. Internal Revenue Service, 77 F.3d 1297, 1301 .;
Contact Our Cleveland Tax Debt Lawyers At Luftman Heck & Associates
Tax debt law is very complex. For this reason, if you are stressed out about your tax debt, you should consult our skilled Cleveland tax debt lawyers at Luftman, Heck & Associates. In a free consultation, well let you know whether you can discharge your tax debt in Chapter 7 bankruptcy or repay it over time through a Chapter 13 payment plan. Call us at today.
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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.
Focusing On Some Debt Vs Lump Sum Debt
Debt relief programs tend to focus on one creditor or a small part of your debt. This may not be helpful if you have numerous credit cards or medical debt from various places. Through the U.S. Bankruptcy Code, you have the option to:
- Discharge multiple debts in Chapter 7 bankruptcy
- Create an effective repayment plan for all your debt in Chapter 13 bankruptcy
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Chapter 7 Bankruptcy Liquidation Under The Bankruptcy Code
Liquidation under Chapter 7 is a common form of bankruptcy. It is available to individuals who cannot make regular, monthly, payments toward their debts. Businesses choosing to terminate their enterprises may also file Chapter 7. Chapter 7 provides relief to debtors regardless of the amount of debts owed or whether a debtor is solvent or insolvent. A Chapter 7 Trustee is appointed to convert the debtors assets into cash for distribution among creditors.
To take full advantage of the bankruptcy laws and get a fresh start, it is important that you do not continue to incur additional debt. If all or part of the reason you are filing bankruptcy is overdue federal tax debts, you may need to increase your withholding and/or your estimated tax payments. For help determining the proper withholding, visit our online Tax Withholding Estimator. For help with your estimated taxes, visit our Estimated Taxes page.;
Find basic information about Chapter 7 bankruptcy below. For more detailed information see the U.S. Courts Bankruptcy Basics Web page.
How Tax Debt Is Treated In Chapter 7 And Chapter 13 Bankruptcy
Provided that your tax debt meets the requirements to be discharged, you may be eligible to file under Chapter 7, Chapter 11 or Chapter 13.
- In;Chapter 7 bankruptcy, an automatic stay is enacted which immediately stops creditor collections. Debt should be discharged about 90 days after the case is opened. Only after debts are discharged can the IRS pursue collection. However, you may be able to eliminate the tax debt through discharge, stopping the IRS from collection efforts. During the interim, you can plan for repaying any debt that is not discharged.
- In Chapter 13 bankruptcy, or reorganization bankruptcy, you have time to;repay what you owe in smaller amounts. Some debts can be discharged through Chapter 13 bankruptcy;as well.
Make sure you choose the right bankruptcy solution;for tax forgiveness;by speaking to a lawyer today.
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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.Â;BankruptcyÂ;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.
Q How Can I Further Prevent Irs Debt
A.;A personalized tax assessment with IRS tax attorney Taylor Randolph can help you evaluate your tax situation to discover potential solutions that help you minimize your tax liability. With an advanced degree in taxation, a detailed understanding of taxpayer rights, and experience dealing with the IRS, we can help you develop a strategy to prevent unnecessary tax burdens.
When Should You Use Chapter 13 Bankruptcy To Stop Foreclosure
Filing for Chapter 13 bankruptcy to save your house from getting foreclosed should be your last resort. Its better to consider other options first. For one, bankruptcy will leave a bad mark on your credit score for several years.
Instead of choosing that as your first option, why dont you consider non-bankruptcy solutions instead? Try negotiating with the mortgage lender and ask if you could come up with a repayment program or seek out government programs, such as FHA loans that may help you keep up with your current mortgage payments.
Plus, filing for bankruptcy is expensive, especially if youre already short of funds. Youre probably wondering how much it costs to file bankruptcy. You will pay a $338 filing fee for Chapter 7 and a $313 filing fee for Chapter 13 bankruptcy.
Get A Free Tax Analysis That Considers All Tax Solutions
The best way to eliminate your tax liability can only be determined after a full evaluation of the facts and circumstances of your particular case. Bankruptcy is just one solution of a number of solutions. If you desire to know specifically how you can become free of tax and other debt, give us a call!
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Limits To The Automatic Stay
The auto-stay may be limited to 30 days after you file your case if you filed another bankruptcy in the previous year and voluntarily dismissed that case. This limit was put into place to prevent debtors from filing multiple bankruptcies just to hold their creditors at bay. If you filed a bankruptcy in the last year, you can request that the court extend the auto-stay, but you must first show the court that you filed your cases in good faith and not to abuse the auto-stay.
If you filed two or more bankruptcies in the previous year and voluntarily dismissed them, you will not be protected by the auto-stay, unless you prove to the court that you filed in good faith.
Additionally, a creditor can request relief from the auto-stay, meaning it can ask the court for permission to collect. Most commonly, this happens with secured debt related to real estate or cars, but the IRS can seek relief from the court if you committed tax fraud.
Why People Choose Between Debt Relief And Bankruptcy
When a person canât pay their debts, creditors can become extremely demanding in their attempts to collect debts. In some cases, debt collectors may harass individuals for payment of debts. Of course, if you don’t have enough income to make all of your monthly payments then what the debt collector that is calling you may suggest, your financial situation may simply make a payment plan to get back on track impossible.
Some debt collectors and creditors may push you toward a specific debt relief option. Keep in mind, though, that their recommended debt relief option may not be in your best interest , but it could be in the best interest of the creditor.
Before you decide to use any debt relief program, you need to carefully review all of your options to get out of debt. Some debt settlement programs could cause you to get into additional debt problems if you are not careful.
You should only make a decision about how to get out of debt after weighing the pros and cons of each debt relief option.
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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