Does Filing Bankruptcy Eliminate Tax Debt?
Filing for bankruptcy can be a stressful and overwhelming process, but it can also bring relief and a fresh start to those who are struggling financially. However, before deciding to file for bankruptcy, it is important to understand how it can affect your tax debt.
Types of Tax Debt
There are two types of tax debt: priority tax debt and non-priority tax debt. Priority tax debt includes any tax debt that is not dischargeable in bankruptcy, such as recent income tax debt, payroll taxes, and trust fund taxes. Non-priority tax debt includes older income tax debt and other tax-related debts that may be dischargeable in bankruptcy.
Dischargeable Tax Debt
Under certain circumstances, non-priority tax debt can be discharged in bankruptcy. To be eligible for discharge, the following criteria must be met:
- The tax debt must be income tax debt
- The tax debt must be at least three years old
- The tax return must have been filed at least two years prior to filing for bankruptcy
- The tax assessment must be at least 240 days old
If these criteria are met, the non-priority tax debt may be discharged in bankruptcy, but it is important to note that any interest or penalties that have accrued on the debt will not be discharged.
Non-Dischargeable Tax Debt
Priority tax debt, such as recent income tax debt, payroll taxes, and trust fund taxes, is not dischargeable in bankruptcy. This means that even if you file for bankruptcy, you will still be responsible for paying this debt. It is important to speak with a tax professional or bankruptcy attorney to determine which type of tax debt you have and how it will be affected by filing for bankruptcy.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is a type of bankruptcy that allows for the discharge of certain types of debt, including some types of tax debt. To qualify for Chapter 7 bankruptcy, you must meet certain income requirements and pass a means test.
If you file for Chapter 7 bankruptcy and have non-priority tax debt that meets the criteria for discharge, it may be discharged in the bankruptcy. However, if you have priority tax debt, it will not be discharged and you will still be responsible for paying it.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is a type of bankruptcy that involves a repayment plan over a period of three to five years. This type of bankruptcy can be helpful for those who have significant assets that they want to protect, as it allows for the repayment of debt while still retaining ownership of assets.
If you file for Chapter 13 bankruptcy and have non-priority tax debt that meets the criteria for discharge, it may be dischargeable in the bankruptcy. However, any priority tax debt will still need to be paid back as part of the repayment plan.
Filing for bankruptcy can be a complicated and emotional process, but it can also provide relief and a fresh start for those who are struggling financially. When it comes to tax debt, it is important to understand which types of debt can be discharged in bankruptcy and which types of debt will still need to be paid back.
If you are considering filing for bankruptcy and have tax debt, it is important to speak with a tax professional or bankruptcy attorney to determine the best course of action for your specific situation. With the right guidance and support, you can take steps towards financial freedom and a brighter future.
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