Is Bankruptcy The Way To Deal With Overdue Tax Debt?
If you owe back income taxes, tax season is a painful reminder of the overdue obligations that are likely always in the back of your mind. If you are unable to pay back your taxes, you may be considering bankruptcy as a solution to your problems. However, bankruptcy may not always provide the quick and easy solution that you would expect.
Discharge Is Limited
Most people file bankruptcy expecting that their debts will be discharged. However, the discharge bankruptcy offers is fairly limited when it comes to tax debt. Specifically, you may be able to obtain a discharge of your tax debt if:
- Your income tax debt has been overdue for three or more years;
- You filed your tax return for the debt two or more years ago;
- The taxes were assessed at least 240 days ago; and
- You have not committed or attempted to commit tax fraud or evade your taxes
If your tax debt meets all of these criteria, bankruptcy can discharge it, which eliminates the legal requirement to repay it.
Bankruptcy May Still Be Able To Help
If you are one of the many persons who do not qualify for the bankruptcy discharge of your tax debt, you may think that filing bankruptcy would not help you. However, this is not necessarily the case. If you are also burdened by other types of debt, and your tax debt is a fairly small percentage of your total debt obligations, filing Chapter 7 bankruptcy may be able to help, as it can discharge most of your other debts. Once free of your credit card debts and medical bills, for example, you can use your available financial means to pay off your tax debt.
If, on the other hand, your tax debt is fairly large (or you have few other debts), filing Chapter 13 may be a more effective solution. Chapter 13 helps by consolidating your tax debt into a payment plan. Under the plan, you pay off your tax debt in affordable monthly installments over three to five years. As you are paying off your tax debt, the IRS (or tax authority) cannot garnish your wages or institute any other collections action against you. Additionally, you are protected against being charged penalties or interest on your debt.
Depending on the situation you find yourself in, bankruptcy may or may not be the logical next step . As a result, if you are struggling with tax debt, it is best to consult with an experienced bankruptcy attorney. An attorney can review your available options with you and recommend the best solution for you.
