If you face significant tax debt and are receiving calls from the IRS or your state’s department of revenue, it is important to be proactive about the situation. It is also important to explore your legal options. Depending on your specific situation, you may be able to achieve tax debt relief by filing for bankruptcy.
The attorneys at Tom Bible Law in Chattanooga, Tennessee, are here to help you explore tax debt relief options. Laws related to both bankruptcy and taxes are complicated, but our attorneys are experienced in this area, and we are here to stand up for your rights.
Bankruptcy and tax debt
Filing for bankruptcy can clear tax debt, depending on the nature and exact details of your situation. Certain tax obligations may be discharged, forgiven, or managed in a bankruptcy filing. However, it’s important to understand that bankruptcy does not eliminate all types of tax debt, but it has proven a very effective form of tax debt relief for many.
You can discharge (completely wipe out) debts for federal income taxes in Chapter 7 bankruptcy only if all of the following conditions are true:
- Only income taxes. Taxes other than income, such as payroll taxes or fraud penalties, can never be eliminated in bankruptcy.
- You did not commit fraud or willful evasion. If you filed a fraudulent tax return or willfully attempted to evade paying taxes (such as using a false Social Security number on your tax return), bankruptcy will not help.
- Debt is at least three years old. To eliminate a tax debt, the tax return must have been originally due at least three years before you filed for bankruptcy.
- You filed a tax return. You must have filed a tax return for the debt you wish to discharge at least two years before filing for bankruptcy.
- You pass the “240-day rule.” The income tax debt must have been assessed by the IRS at least 240 days before you file your bankruptcy petition, or must not have been assessed yet.
It is also important to note that even if your taxes are discharged, this doesn’t mean that any tax liens you have will go away. The tax lien will remain on your property if the IRS recorded it before you filed for bankruptcy. This can make it impossible to sell the property until you pay the debt.
Types of bankruptcy and tax debt
We discussed Chapter 7 bankruptcy requirements above, but let’s look at the other types of bankruptcy a little more closely as they relate to tax debt. Every chapter has a different set of requirements and processes.
Chapter 11 Bankruptcy — Chapter 11 is available to any business or individual, although it is primarily used by corporations. Unlike chapter 7, Chapter 11 will not completely absolve you of all of your IRS tax debts. It’s more like a reorganization plan where some debts will be repaid and others will be forgiven. The individual or business will have its entities reviewed by a bankruptcy trustee who will balance the competing interests of creditors and the IRS.
Chapter 12 Bankruptcy — This chapter only applies to fishermen and farmers who get behind on their taxes. These businesses are treated differently because they are usually the first to be affected by an economic downturn or natural disaster. The requirements and process are very similar to a Chapter 13 filing but with further leniencies and special conditions.
Chapter 13 Bankruptcy — Chapter 13 is also called a wage earners plan. It allows individuals with regular income to develop a plan to repay all parts of their debt. The debtor will create a payment to repay their creditors over a period of 3-5 years in installments. If a debtor files a Chapter 13 bankruptcy and complies with the payment plan that is confirmed by the bankruptcy court, that debtor will receive broad discharge of all the debts that were included in that payment plan.
At the Law Office of W. Thomas Bible, Jr., our attorneys will work with you personally to help you determine if filing for bankruptcy is right for you. We have extensive experience handling tax debt issues for clients from Chattanooga and throughout Tennessee and North Georgia.
Discover Tom Bible Law in Chattanooga, TN
If you are struggling with excessive debt and looking for a sound solution, the attorneys at Tom Bible Law, can help you explore your legal options. We have helped numerous clients from Chattanooga and throughout Tennessee and North Georgia achieve their debt relief goals by guiding them through the bankruptcy process. We work with every client personally, giving each and every bankruptcy case the time and attention it needs. We understand the financial pressures our clients are facing and work to resolve their debt problems in a favorable, cost-effective manner. Our bankruptcy lawyers have more than 80 years combined experience and are here to help. Call us today at 423.454.2334 or drop us a note here.