Filing for bankruptcy can provide much-needed relief from overwhelming debt, but when it comes to tax debts, the situation can be a bit more complicated. Not all tax debts are dischargeable in bankruptcy, and understanding the rules and exceptions is crucial before you file.
Here’s what you need to know about how bankruptcy affects tax debts.
1. Understanding Dischargeable vs. Non-Dischargeable Tax Debts
When considering bankruptcy, it’s important to understand that not all tax debts can be wiped out. Generally, recent tax debts are non-dischargeable, meaning you’ll still owe them even after your bankruptcy case is completed. However, older tax debts may be eligible for discharge if they meet specific criteria.
To be dischargeable in bankruptcy, tax debts must meet the following conditions:
- The Tax Return Must Be Due at Least Three Years Before Filing: The tax return associated with the debt must have been due at least three years before you file for bankruptcy. This includes extensions.
- The Tax Return Must Have Been Filed at Least Two Years Before Filing: You must have filed the tax return at least two years before filing for bankruptcy. If you didn’t file your taxes, or if you filed them late, this rule could prevent the debt from being discharged.
- The Tax Debt Must Have Been Assessed at Least 240 Days Before Filing: The IRS must have assessed the tax debt at least 240 days before you file for bankruptcy. If there was an audit or the IRS reassessed your taxes, this could affect the timing.
- No Fraud or Willful Evasion: The tax debt cannot be the result of fraudulent activity or willful tax evasion. If the IRS determines that you intentionally tried to evade paying taxes, the debt will not be dischargeable.
If your tax debts meet all of these criteria, they may be discharged in a Chapter 7 bankruptcy.
2. Chapter 7 Bankruptcy
In Chapter 7 bankruptcy, non-exempt assets are liquidated to pay off debts. If your tax debts are dischargeable, they will be wiped out along with your other unsecured debts. However, if they are non-dischargeable, you’ll still owe them after the bankruptcy is complete.
Chapter 7 can be a viable option for dealing with older tax debts that meet the discharge criteria. It’s a straightforward process that allows you to eliminate qualifying debts and get a fresh start financially.
3. The Impact of Bankruptcy on IRS Collections
Filing for bankruptcy triggers an automatic stay, which temporarily halts all collection actions, including those by the IRS. This means that wage garnishments, bank levies, and other collection efforts will stop while your bankruptcy case is pending.
The automatic stay can provide significant relief, giving you time to sort out your financial situation without the immediate pressure of IRS collections.
4. Consider Professional Guidance
Navigating the intersection of bankruptcy and tax debts is complex, and small mistakes can have significant consequences. Consulting with a knowledgeable bankruptcy attorney is crucial to ensure that you understand your options and make the best decisions for your financial future.
An attorney can help you determine whether your tax debts are dischargeable and guide you through the process of filing for bankruptcy.
Secure Your Financial Future: Consult with Fitzgerald & Campbell, APLC Today
Filing for bankruptcy can be a powerful tool for resolving debt, but when tax debts are involved, the situation requires careful consideration. By understanding the rules and seeking professional advice, you can make informed decisions that help you achieve financial stability.
Reach out to Fitzgerald & Campbell today at (844) 431-3851 to learn more.