Many people wonder if they can escape tax debt by filing for bankruptcy. The answer is complicated and depends on various circumstances. Finding out when you can use bankruptcy for tax debt may help you figure out whether this could be a realistic option for you. Feel free to explore this further with a Chattanooga bankruptcy attorney who can help.
Can Bankruptcy Be Used for All Taxes?
Filing for bankruptcy can help you escape some tax debt but not all tax debt. Since tax debt is owed to the government and often results from not filing taxes, this type of debt discharge is less lenient than other debt discharges. In other words, most tax debts cannot be erased through bankruptcy.
The tax debt that can be eliminated with bankruptcy varies depending on whether you are filing for Chapter 7 or Chapter 13 bankruptcy. Under Chapter 7 bankruptcy, the only tax debt you can address is income tax. Chapter 7 bankruptcy does not discharge tax debt entirely but will have you repay the debt under a more feasible repayment plan.
However, even the income tax debt that can be discharged under Chapter 7 bankruptcy must be old enough to be discharged. Tax debt older than two years can usually be erased, but this is not often the case with newer tax debt. Fraudulent activity related to tax debt may also prevent you from discharging this debt.
Filing for Chapter 13 bankruptcy may not erase your tax debt but can give you more time to pay back the debt. What happens is your old repayment plan for tax debt is replaced with a newer, more manageable repayment plan. This new repayment plan often gives you more time, a lower interest rate, and a lower monthly payment.
Bankruptcy Tax Obligations
Not everyone realizes the tax obligations for bankruptcy that can create potential problems if not followed. For Chapter 13 bankruptcy, the Internal Revenue Service (IRS) requires people to file tax returns within four years of filing for bankruptcy. Taxes must still be paid and filed during the bankruptcy process itself.
A Chapter 13 bankruptcy case can be denied if these tax rules are not followed. This could lead to worse financial outcomes. Those filing for Chapter 7, Chapter 11, or Chapter 12 bankruptcy must also file income tax returns and pay income tax. Post-petition tax liabilities are not discharged under these types of bankruptcy.
If a bankruptcy case is dismissed, then the IRS may collect any tax owed to them. When the bankruptcy case succeeds, certain tax debts can be discharged, including those in the case itself and any taxes older than three years. This means the IRS would not collect on these discharged taxes.
Call Tom Bible Law for Legal Help
Tax debt can become overwhelming when you have multiple financial responsibilities. You can call us at Tom Bible Law by dialing (423) 424-3116 for a consultation today about your options for bankruptcy. Our experienced team of Tennessee bankruptcy lawyers is prepared to help you figure out which taxes might be eligible for bankruptcy. We can be found throughout the Tennessee cities of Chattanooga and Tullahoma.