Have you ever found yourself in a situation where you owe back taxes and are considering filing for bankruptcy relief? If so, you're not alone. Many people file for bankruptcy due to back taxes, which is one of the most common types of debt. While most income tax debt is not dischargeable in bankruptcy, some old back taxes debt can be eligible for a bankruptcy discharge. Let's take a closer look at how back taxes work in bankruptcy and what you need to know.
Is Income Back Taxes Debt Dischargeable in Bankruptcy?
Did you know that most debts owed to the government, including personal income taxes, cannot be eliminated in bankruptcy? However, don't lose hope just yet. If your income back taxes debt meets certain criteria, you might be able to eliminate back taxes in bankruptcy. Let's explore what that means in simpler terms.
Firstly, the back taxes debt must be for personal income taxes. Secondly, the income tax debt must have become due at least three years before you filed your bankruptcy petition. Thirdly, the tax returns associated with the income taxes were filed at least two years before you filed your bankruptcy petition. Lastly, the IRS must have assessed your income tax debt at least 240 days before you filed your bankruptcy petition. If your income tax debt meets the above criteria, you might be able to eliminate back taxes in bankruptcy. Exciting, right?
How Are Personal Income Back Taxes Taxes Treated in Chapter 7?
If you're struggling with income tax debt, filing for Chapter 7 bankruptcy might be a solution for you. The good news is that if your tax debt meets certain criteria, the discharge can eliminate it entirely.
But what if your tax debt doesn't qualify for a discharge? Unfortunately, you'll still be responsible for paying off that debt even after receiving a Chapter 7 discharge. The good news is that you can work out a repayment plan with the IRS or state tax authority once you've completed Chapter 7.
How Are Personal Income Back Taxes Treated in Chapter 13?
When it comes to personal income tax debt, figuring out if it's eligible for a discharge determines how it will be treated in Chapter 13. If the tax debt meets the discharge criteria, it's considered a general unsecured debt. This means that the taxing authority will receive a portion of the old tax debt through the Chapter 13 plan, and the remaining balance of the old tax debt will be discharged upon completion of the plan. This is great news for you because you'll only have to pay a portion of the debt owed to the taxing authority.
However, if the income tax debt is not eligible for a discharge, it becomes a priority unsecured debt. This means that your Chapter 13 plan must fully pay off the debt owed to the IRS or state taxing authority. Though you'll have to repay the tax debt in full, the payments will be spread out over your Chapter 13 plan, making it more affordable to pay back taxes. Plus, you won't typically incur additional penalties and interest on the tax debt during the Chapter 13 plan, which saves you money compared to repaying the tax debt under an IRS repayment plan.
How Are Other Taxes Treated in Chapter 7 and Chapter 13?
When it comes to taxes owed to the IRS and state taxing authorities, it's important to know that they are usually not eligible for discharge in bankruptcy. This means that even if you file for Chapter 7 or Chapter 13, you will still be responsible for paying these taxes.
Some examples of non-dischargeable tax debt include employment taxes, sales tax, real estate property taxes (if you plan on keeping the property), payroll withholding taxes, overpayment of tax refunds, excise taxes, custom duties, and tax liens.
If you file for Chapter 7, you will still be liable to pay these taxes even after receiving your bankruptcy discharge. In order to avoid collection efforts such as wage garnishments, levies, and tax liens, you will need to work out an arrangement to pay the tax debt.
On the other hand, if you file for Chapter 13, your tax liability can be included in your repayment plan. Depending on the type of debt and other circumstances, your tax debt may be classified as a secured debt, priority unsecured debt, or general unsecured debt. The category of debt will determine whether your Chapter 13 plan fully or partially pays your tax debt.
Tax Debts in Bankruptcy Can Be Complicated
Dealing with income tax debt can be quite challenging as it is not always clear whether it is dischargeable or not. Recent changes to the Bankruptcy Code and the Federal Tax Code have made it even more difficult to discharge tax debt in bankruptcy. Additionally, determining the exact amount owed for tax debt has become more complicated due to new rules that allow interest and penalties to accrue or be classified as priority tax debts.
If you are struggling with tax debt, you may want to explore tax debt relief options to help resolve the issue. It is also advisable to consult an experienced bankruptcy attorney before filing for Chapter 7 or Chapter 13 bankruptcy. Your case may require a careful analysis of the current Bankruptcy Code and tax laws to determine the best course of action.
Do You Owe Back Tax Debts You Cannot Pay?
If you're facing back taxes, you might be wondering what your options are. Luckily, there are ways to handle this type of debt, such as filing for Chapter 7 or Chapter 13 bankruptcy. We can assist you in determining whether you qualify for Chapter 7 or Chapter 13, and help you compare your options for debt relief. If you require legal advice, we can also connect you with a bankruptcy attorney in your area. Don't let back taxes weigh you down - let us help you find a solution.