Trapped by Tax Debt? Know Your Options
You may have heard the saying that there are two things that are certain in life: death and taxes. This old adage may not be true in some situations. Under certain conditions, you can discharge tax debts by filing bankruptcy. However, your tax debts must meet particular qualifications to be discharged.
Tax Treatment Under Chapter 7 and Chapter 13 Bankruptcy
Individuals will usually file for bankruptcy under either Chapter 7 or Chapter 13. You can sometimes discharge taxes in Chapter 7 bankruptcy, but it is not possible under Chapter 13.
Chapter 7 bankruptcy is a liquidation. Under that type of bankruptcy, you will tally up the value of all of your assets. The assets that do not qualify for an exemption must be sold and will be used to pay creditors. If the money from the sale is less than what you owe, then the remaining amount is discharged, with a few exceptions.
Under Chapter 13, you create a payment plan that will usually last between three and five years. You cannot discharge your taxes when you file Chapter 13. Instead, you simply create a payment plan that addresses your tax burden. This type of arrangement can be helpful for those who just need a more manageable payment plan than what the IRS offers.
Taxes that Can be Discharged in Chapter 7
Taxes can only be forgiven, or discharged, if they meet specific qualifications. These include:
- Taxes from income. Income taxes are the most common form of taxes. However, other types of taxes, such as property taxes or payroll taxes are not eligible for discharge.
- You have filed a tax return. Many people who owe back taxes decline to file a tax return as well. This is not a good a practice because it increases the potential penalties that can be assessed and it inhibits your ability to discharge your tax debts. These returns must also be filed on time, not during the bankruptcy process.
- The tax debt is at least three years old. Only old taxes can be discharged. Anything more recent is not eligible for discharge. The date that you use to measure the age of a tax debt is when it was due, not necessarily when you filed a return.
- You did not commit fraud. If you filed a fraudulent return or you have attempted to evade taxes, you will not be able to discharge this debt in bankruptcy.
- Your tax debt was assessed at least 240 days before you filed bankruptcy. Only taxes that have been assessed at least 240 days before you filed bankruptcy are eligible for discharge. Keep in mind that the assessment date is not necessarily the same date that your taxes were due.
Although it is difficult to qualify to discharge taxes, it is certainly possible. Bankruptcy can be a good option for those who are dealing with high back taxes that are older. The bankruptcy attorneys at Maxwell Dunn will be able to examine your tax situation and let you know if bankruptcy is the right option for you. Call 248-936-6390 for more information or to schedule an appointment today.See all videos