Does bankruptcy clear tax debt ?

Deciding to file for bankruptcy is not easy. However, you may be drowning in medical bills that your insurance will not cover, you may have lost your job and been unable to find another with a similar income, or your hours might have been reduced. You may also find yourself unable to pay for the expenses associated with a divorce or be facing unexpectedly large tax debts that you are unable to pay. If that is your case, this lawyer recommends you learn more about Chapter 7 or Chapter 13 bankruptcy to make an informed decision and get the right solution for the financial burden you are facing now.

Bankruptcy and Tax Debt

If you are in a situation where you owe the IRS back taxes, filing for Chapter 7 bankruptcy will help you clear your tax debt providing the taxes owed meet certain requirements. Although it may not be possible to eliminate all back taxes, this is something you should consider, particularly if:

The taxes you owe are income taxes – This is because both state and federal income taxes can be eliminated through Chapter 7 bankruptcy.

Your tax debt is at least three years old – Otherwise, you will not qualify for the benefits of a Chapter 7 bankruptcy.

You filed your tax return at least two years before filing for bankruptcy – The back taxes you want to discharge must be for a return you filed at least two years ago before filing for bankruptcy. Debt from a return that is filed late cannot be eliminated through bankruptcy.

The IRS must have assessed debt 240 days before the bankruptcy – The 240-day rule states that the IRS must have assessed debt 240 days before you filed for bankruptcy. 

If you fail to meet these criteria, you will still owe your back taxes and must find a way to pay them.

Why do you need to get an automatic stay?

The court will issue an automatic stay to stop the IRS from collecting your back taxes whenever you file for Chapter 7 or Chapter 13 bankruptcy. This means that at this point, all collections will be stopped, and all creditors, including the IRS, cannot sue you, call you, bill you, or garnish your wages.

This automatic stay is not permanent. Your bankruptcy case may be dismissed or closed, at which time the stay will be lifted. If you had a refund coming to you, the IRS might hold on to it to collect from it once the stay is lifted. If you were counting on a large refund, talk to your attorney to get an idea of how to keep some of it.

If you owe child support, keep in mind that even when the automatic stay is in place, child support collections may continue.

Why do automatic stays have restrictions?

The restrictions were put in place to prevent debtors from filing multiple bankruptcies in an attempt to benefit from the automatic stay. You may request that your automatic stay be extended above the 30 days it lasts after you file for bankruptcy by proving that you are filing in good faith. Good faith can be shown if you make accurate financial disclosures or show proof that your financial situation became dire due to circumstances beyond your control, such as losing a job. 

 

I am Veeramachineni Lalitha Part Time Blogger From India . I am basically house wife working Free Time on Blogging . I love to write articles on Tech News , Finance , Business , Make Money Online , Latest Gadgets etc .