Have you ever heard that filing for personal bankruptcy can eliminate your tax debt? While that may be partially true, depending on your situation, it’s not the whole story. Curious what happens to your tax debt if you choose to file for Chapter 7 or Chapter 13 bankruptcy? Ron Lunquist, Attorney at Law, explains how bankruptcy and tax debt work below.
Back Taxes: What Happens to Them in Bankruptcy?
Back taxes, also referred to as unpaid income taxes, are the most common type of debt owed to the Internal Revenue Service. And even if you only owe a few thousand dollars, when you have the world’s largest tax collection agency on your heels, a relatively small amount of debt can feel overwhelming.
If you owe back taxes and file for Chapter 7 or Chapter 13 bankruptcy, your debt can be wiped out, but only if you meet the following stipulations:
● You only owe personal income taxes. Any debt owed to the IRS other than unpaid income taxes cannot be eliminated in personal bankruptcy.
● Your debt is a minimum of three years old. To have your unpaid income taxes eliminated in personal bankruptcy, your debt must be at least three years old before you file.
● You did not willfully commit fraud or evasion. If you filed a fraudulent tax return or committed willful tax evasion by any other means, your back taxes cannot be eliminated through filing for personal bankruptcy.
● You meet the 240-day rule. For back taxes to be eliminated in personal bankruptcy, the IRS must have assessed your debt at least 240 days before you file your bankruptcy petition. Or, the IRS must not have assessed your debt at all prior to the date you file.
● You filed a tax return. You must have filed an income tax return for any tax debt you’d like to discharge. That return must have been filed at least two years prior to the date you file for bankruptcy. If you filed a late return, usually, your back taxes cannot be discharged.
What Happens to Tax Liens in Bankruptcy?
If the IRS put a tax lien on your property before you filed for Chapter 7 or Chapter 13 bankruptcy, unfortunately, that lien cannot be discharged. Filing for personal bankruptcy can absolve you of your personal obligation to repay qualifying back taxes. It will also prevent any further collection actions from the IRS. But if there’s an existing tax lien on your property, you must pay it off if you ever want to sell it in the future.
Need Advice on Your Bankruptcy Options? Contact Ron Lundquist, Attorney at Law
Filing for personal bankruptcy is a major life decision and one should never make on your own. If you’re feeling overwhelmed by your debts, please understand that help is just a phone call away. When you need the expertise of a knowledgeable, compassionate bankruptcy attorney, contact Ron Lunquist, Attorney at Law. To request a free consultation or learn more about how I can help you, call my office at 651-454-0007 or you can send me a message, and I’ll be in touch.