Contrary to what you may have heard, bankruptcy can provide relief from the IRS.
Some taxes and penalties are dischargeable in a Chapter 7 bankruptcy. Those that can’t be discharged can be paid without interest via a Chapter 13 repayment plan.
The automatic stay triggered by filing bankruptcy stops even the tax man from garnishing your wages or seizing your property. This applies to both state and federal tax agencies.
How much tax relief can I get?
Which of your tax debts can be discharged in bankruptcy depends on several factors, including:
- The kind of tax involved;
- The age of the tax;
- Whether you filed a tax return; and
- Whether the tax was recently assessed.
These three rules describe which taxes can be erased by bankruptcy:
- They are unsecured income taxes that first came due over three years before you filed bankruptcy;
- You filed a timely and non-fraudulent return for those taxes; and
- They were assessed more than 240 days before you filed for bankruptcy.
What is an offer in compromise?
If your tax debt is too big to pay off in a Chapter 13 plan, an offer in compromise might be a better solution.
The taxing authorities will consider an offer in compromise if they doubt that you owe the tax, or they doubt that they could ever collect the full amount of the tax.
Be careful, though: often, an offer in compromise is designed to get you to tap into family or illiquid assets that the government couldn’t otherwise touch to settle your debt.
This is a super-simple summary of how taxes are treated in bankruptcy.
The subject of taxes in bankruptcy is a complex one – for every rule, there is an exception or additional complication that isn’t obvious.
Be sure to bring any tax issues up to your bankruptcy lawyer during your consultation – and don’t hire the cheapest lawyer in town when dealing with the tax man. Remember Willie Nelson.
How can I be sure my tax debts are dischargeable?
You don’t have to go it alone – an experienced bankruptcy attorney can guide you through the labyrinthine subject of taxes in bankruptcy. It’s free to chat with me about your options – you can call or text me at 215.551.7109, or drop me a line.
