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Introduction
Bankruptcy is a legal process that provides relief to individuals and businesses that are unable to pay their debts. It can help to eliminate or restructure debt, but does it clear tax debt? The answer isn’t straightforward, so let’s explore the various scenarios that can arise during bankruptcy proceedings.
Chapter 7 Bankruptcy and Tax Debt
Chapter 7 bankruptcy is a liquidation process where non-exempt assets are sold to pay off creditors and any remaining debts are wiped out. In some cases, tax debt can be discharged under Chapter 7 bankruptcy, but there are specific rules that apply.
Firstly, the tax debt must be income tax debt that is at least three years old. Next, the tax return must have been filed at least two years before filing for bankruptcy. Thirdly, the IRS must have assessed the tax debt at least 240 days before filing for bankruptcy.
If these conditions are met, the tax debt can be discharged under Chapter 7 bankruptcy. However, there are some exceptions to this rule. For example, if you committed tax fraud, withheld taxes from employees but didn’t pay them, or filed a fraudulent tax return, your tax debt cannot be discharged.
Chapter 13 Bankruptcy and Tax Debt
Chapter 13 bankruptcy is a reorganization process where debts are consolidated and a payment plan is established to pay off creditors over a period of three to five years. Unlike Chapter 7 bankruptcy, tax debt cannot be fully discharged under Chapter 13 bankruptcy.
However, tax debt can be included in the payment plan, which can make it more manageable to pay off. The payment plan will be based on your disposable income, which is calculated by deducting your monthly expenses from your monthly income. Any disposable income will be used to pay off your debts, including tax debt.
If you owe tax debt from the previous three years, you must pay it in full over the three to five-year period of your Chapter 13 plan. If you owe older tax debt, it may not have to be paid in full, but it will be included in the payment plan.
FAQs
Q: Can bankruptcy clear all tax debt?
A: No, not all tax debt can be cleared through bankruptcy. Income tax debt that is at least three years old, and meets other requirements can be cleared under Chapter 7 bankruptcy, and it can be included in a payment plan under Chapter 13 bankruptcy.
Q: Can I still owe taxes after bankruptcy?
A: Yes, you can still owe taxes after bankruptcy. However, any tax debt that meets the requirements for discharge may be wiped out.
Q: Will bankruptcy stop the IRS from collecting taxes?
A: Bankruptcy can stop the IRS from collecting taxes while the bankruptcy case is ongoing. However, once the bankruptcy case is closed, the IRS can resume collection actions if taxes are owed.
Q: Will bankruptcy affect my credit score?
A: Yes, bankruptcy will affect your credit score. It will remain on your credit report for up to ten years, and can lower your credit score by hundreds of points.
Conclusion
In summary, bankruptcy may or may not clear tax debt, depending on the type of bankruptcy and the age of the tax debt. Under Chapter 7 bankruptcy, income tax debt that is at least three years old, and meets other requirements can be discharged. Under Chapter 13 bankruptcy, tax debt can be included in a payment plan, but must be paid in full if it is from the previous three years. Ultimately, bankruptcy should only be considered as a last resort, as it can have significant long-term consequences on your credit score and financial future.
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Article Summary:
Bankruptcy relief may or may not clear tax debt, depending on the type of bankruptcy and the age of the tax debt. Income tax debt at least three years old and that meets other requirements can be discharged under Chapter 7 bankruptcy. Under Chapter 13 bankruptcy, tax debt can be included in a payment plan but must be paid in full if it is from the previous three years. However, taxpayers who have committed tax fraud, withheld taxes from employees but did not pay them or filed a fraudulent tax return cannot discharge their tax debt through bankruptcy.
