Can filing bankruptcy help me with my income tax debt?
Unlike other debts, bankruptcy is not always a sure-fire solution to tax debt.
Tax season can hardly be called the happiest time of the year for anyone, except perhaps CPAs and tax preparers. However, if you owe back income taxes, this time of year can be an especially painful reminder of your debt. If you are in this situation, you may have heard that bankruptcy can help you get back on track. However, bankruptcy is not always the immediate and direct solution that it is for other types of debt.
Tax debt not always dischargeable
Unlike debts such as credit card and medical bills, tax debt is not always dischargeable in bankruptcy. To be dischargeable, your income tax debt must meet several stringent requirements under the law:
• The tax debt must have been owed for at least three years. If the IRS gave you an extension, three years must have passed since the new due date.
• You must have filed the tax return for the tax debt at least two years prior to filing bankruptcy. If you filed the return late, it can compromise your ability to get a discharge.
• The tax debt must have been assessed by the IRS a minimum of 240 days before the bankruptcy filing date.
• You must have not attempted on the return to evade your taxes.
If all of these criteria are met, your tax debt may be discharged in bankruptcy. Although your debt may not be dischargeable, it may be worth considering filing bankruptcy, as it may still be helpful, but in an indirect way.
If you owe a significant amount of other debts, filing Chapter 7 bankruptcy can be a significant help. Although your tax debt will remain unaffected, Chapter 7 can rapidly wipe out most of your other unsecured debts. Once free of these debts, you can focus more of your cash flow towards paying your taxes.
Chapter 13 may be better fit for you if you owe a significant amount of tax debt or have few other debts. In Chapter 13, your tax debt becomes part of a payment plan. Under the plan, you pay down your tax debt over three to five years in monthly installments. As long as you make the agreed payment each month, the bankruptcy laws prohibit the IRS from garnishing your wages or taking any other action to collect your delinquent debt.
An attorney can guide you
Bankruptcy is an attractive solution for many struggling with tax debt. However, it is not always the best way to proceed. To find out whether it is a viable solution for you, consult with an experienced bankruptcy attorney. The attorneys at Debra Booher & Associates Co., LPA can use their considerable experience to advise you on the best means of getting out of the sticky financial situation in which you find yourself.