Does Bankruptcy Cover IRS Debt?
Bankruptcy is a legal process that offers individuals who are struggling with debts a fresh start. When filing for bankruptcy, you may wonder if your IRS debt is included in the debts that can be discharged. The answer is not straightforward, as it depends on the type of bankruptcy you file and the type of IRS debt you owe. In this article, we’ll explore the different types of bankruptcy and the IRS debts that may be covered.
Types of Bankruptcy
There are two types of bankruptcy that individuals can file for – Chapter 7 and Chapter 13.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is also known as "liquidation" bankruptcy. This is because the court appoints a trustee who will sell your non-exempt assets to pay off your creditors. Any remaining debt that is not covered by the sale of assets is then discharged, meaning you are no longer responsible for paying it back.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is also known as "reorganization" bankruptcy. With this type of bankruptcy, you create a repayment plan that lasts between 3-5 years, where you will pay back a portion of your debts. At the end of the repayment period, any remaining debt is then discharged.
Types of IRS Debt
The IRS can have several types of debts that you may owe. These include:
- Income taxes
- Payroll taxes
- Trust fund recovery penalties
Income taxes are taxes that you owe on your personal income. These taxes can be discharged in bankruptcy, but only if they meet certain criteria. The income tax debt must be at least 3 years old, you must have filed a tax return for the debt at least 2 years prior to filing for bankruptcy, and the IRS must have assessed the debt at least 240 days before you file for bankruptcy.
Payroll taxes are taxes that employers must withhold from their employees’ paychecks. These taxes can be difficult to discharge in bankruptcy, as the IRS has the ability to hold individuals personally liable for these debts. However, if you do qualify for discharge, it can be a significant relief.
Penalties and Interest
Penalties and interest are charges that the IRS can add to your tax debt if you fail to pay on time. These debts can be discharged in bankruptcy if they are associated with income tax debts that meet the criteria for discharge.
Trust Fund Recovery Penalties
Trust fund recovery penalties are penalties that the IRS can assess against individuals who are responsible for collecting and paying over payroll taxes but fail to do so. These debts are not dischargeable in bankruptcy.
In conclusion, whether or not your IRS debt can be discharged in bankruptcy depends on the type of bankruptcy you file and the type of IRS debt you owe. While certain types of taxes can be discharged, others cannot. If you are struggling with IRS debt, it’s important to speak with a bankruptcy attorney who can help you understand your options and guide you through the process.
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