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How Does Bankruptcy Effect Tax Debt

Posted by CHARLES W. DAFF | Aug 12, 2020 | 0 Comments

Most tax debt cannot be discharged in bankruptcy, and you are still required to pay the IRS if you file for bankruptcy.

Declaring bankruptcy can offer individuals who are drowning in a magnitude of debt a sense of financial relief. However, if part of your debt includes taxes, you may not get the relief for which you are searching. Nevertheless, bankruptcy could put an end to IRS harassment.

Continue reading to learn more about bankruptcy and debt below.

Tax Debt and the Automatic Stay

If you have overdue taxes, the IRS will begin their collection efforts with a notification. Then, every three months, they will send an additional letter, each more serious than the last. After a few months, these letters will turn into legal notices. Some of these notices may involve leans, seizing accounts and funds, and even garnishing wages. When you file for bankruptcy, you enter an automatic stay. The automatic stay is essentially a pause button on threats and harassments from creditors, including the IRS, contacting you regarding your overdue payments.

Discharging Tax Debt

As previously stated, most past-due taxes are not dischargeable. For most, you will continue to owe back taxes at the end of your Chapter 7 bankruptcy case. As for Chapter 13 bankruptcy, you will fully repay them in your repayment plan. However, like most rules, there are exceptions to discharging tax debts. If you need to discharge it, Chapter 7 bankruptcy is your only option.

Tax Debt and Chapter 7 Bankruptcy

If each of the following items is true and you qualify for Chapter 7 bankruptcy, you can discharge tax debts:

Overdue taxes and income taxes – If your past-due taxes are payroll taxes or fraud penalties, these cannot be discharged.

  • Fraud was not committed, nor willful evasion – If you have committed bankruptcy fraud or purposefully evaded taxes, you cannot discharge tax debt.
  • Your debt is three years or older – If your debt is less than three years old, your debts cannot be discharged.
  • A tax return was filed – If a tax return was not filed, your tax debt cannot be discharged.
  • You pass the 240-day rule – If the IRS has not assessed your debt 240 or more days before filing, your debts are not dischargeable.

Tax Debt and Chapter 13 Bankruptcy

In the majority of Chapter 13 bankruptcy cases, debts cannot be discharged. Instead, as previously mentioned, you will repay your taxes during your repayment plan, spanning either three or five years.

Contact Charles W. Daff, Bankruptcy Attorney

If you have tax debt and are considering filing for bankruptcy, you need an experienced and creative attorney on your side. With nearly 43 years of experience in bankruptcy law, Charles W. Daff, Bankruptcy Attorney, can help you get the stress out of your finances.  If you reside in Orange County, Riverside County, San Bernardino County or Los Angeles County and are considering filing for bankruptcy, contact Charles W. Daff, Bankruptcy Attorney today.

About the Author

CHARLES W. DAFF

Bankruptcy Attorney in Santa Ana, CA Charles W. Daff  is a State Bar Certified Specialist in Bankruptcy with more than 43 years experience.   The firm represents clients  in Chapter 7, Chapter 11, and Chapter 13 bankruptcy.

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