Filing for bankruptcy can affect certain types of tax debt, but it does not automatically make all tax obligations disappear. The treatment of tax debt in bankruptcy depends on the type of tax, the specific circumstances, and the chapter of bankruptcy you file.
- Tax debt is treated differently than other debts in bankruptcy. In most cases, it’s considered a “priority debt,” meaning it gets higher priority for repayment compared to other unsecured debts.
- Discharging (eliminating) your tax debt through bankruptcy is generally difficult. You’ll need to meet specific criteria and exceptions.
Here’s a General Overview:
- Chapter 7 Bankruptcy:
- In a Chapter 7 bankruptcy, your non-exempt assets may be liquidated to pay off creditors, but certain debts, including some tax debts, may be discharged. However, not all tax debts are dischargeable. To be dischargeable in Chapter 7, the tax debt must meet specific criteria, including that it is income tax debt, the tax return was filed on time, and the tax assessment is at least three years old.
- Chapter 13 Bankruptcy:
- Chapter 13 bankruptcy involves a repayment plan over three to five years. While you won’t necessarily eliminate tax debt in a Chapter 13 case, you may be able to include tax debt in your repayment plan, allowing you to pay it back over time. This can provide a structured way to address tax arrears.
- Priority Tax Debt:
- Some tax debts are considered priority debts and may not be dischargeable in bankruptcy. Priority tax debts include recent income tax debts, certain payroll taxes, and taxes associated with fraud. Priority tax debts are generally not dischargeable, but a Chapter 13 plan can help you manage the repayment.
- Tax Liens:
- Bankruptcy may not remove tax liens. While the personal obligation to pay the tax debt may be discharged, a tax lien secured by property may survive bankruptcy. The IRS or state taxing authority may still have a claim on your property, and you may need to address the lien separately.
- Professional Advice:
- It’s crucial to consult with a tax attorney or bankruptcy attorney to assess your specific tax situation. They can provide guidance on the dischargeability of tax debt based on the applicable bankruptcy laws and help you navigate the complexities of the process.
In summary, while bankruptcy can address certain tax debts, not all tax obligations are dischargeable, and the treatment of tax debt in bankruptcy can be complex. Seeking professional advice is essential to understand how bankruptcy may impact your specific tax situation and to explore the available options for managing tax debt.
Important points to remember:
- Consulting a bankruptcy attorney and a tax professional is crucial before making any decisions. They can assess your specific situation and advise you on the best course of action.
- Bankruptcy shouldn’t be seen as a way to avoid paying your taxes. It should only be considered as a last resort after exploring other options like payment plans or negotiating with the IRS.
- Filing for bankruptcy has long-term implications, including a negative impact on your credit score and potential difficulties obtaining credit in the future.
Here are some additional resources that you might find helpful:
- Internal Revenue Service (IRS): https://www.irs.gov/businesses/small-businesses-self-employed/declaring-bankruptcy
- National Foundation for Credit Counseling: https://www.nfcc.org/
- American Bar Association: https://www.americanbar.org/groups/business_law/about/committees/business-bankruptcy/