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Tax Debt: When Is Bankruptcy an Option?

Tax Debt: When Is Bankruptcy an Option?

By on Dec 19, 2014 in Tax Tips | 0 comments

Tax Debt: When Is Bankruptcy an Option?If you are searching for a way to alleviate your tax debt, you may be wondering if bankruptcy is an option to consider. You may hear radio and TV ads indicating that bankruptcy can be the answer if you have significant tax debt. While it is possible to eliminate some of your tax debt through bankruptcy, like most things, it is a bit more complicated than these ads might lead you to believe. In fact, not all tax debts can be eliminated with bankruptcy. Part of the issue is related to which type of bankruptcy you file. So as you weigh your options, consider the following requirements.

Chapter 7 Bankruptcy and Tax Debt

Chapter 7 bankruptcy may be your best bet for eliminating some or all of your tax debt, especially if you meet the following criteria:

  1. You are trying to eliminate only federal or state income tax debt with Chapter 7 bankruptcy.
  2. The tax debt is from a return due at least three years before you filed for bankruptcy.
  3. You must have filed the tax return (with the debt you are trying to eliminate) two years before you can file for bankruptcy. This means that the return must be complete (signed, mailed and sufficiently complete to qualify).
  4. The IRS must assess the tax debt 240 days before you file for bankruptcy for it to count as debt that can be eliminated via Chapter 7 bankruptcy. If you have received an offer in compromise (to pay less than the amount you owe) or have already filed bankruptcy, this amount of time may be extended.
  5. Finally, the tax return must not be fraudulent and you cannot be guilty of tax evasion.

In summary, Chapter 7 bankruptcy is most useful if you are looking to eliminate income based taxes. You will not be eligible to get rid of tax liens, recent property taxes, employment taxes or erroneous tax returns.

Chapter 13 Bankruptcy and Tax Debt

It is often very difficult to eliminate tax debt via Chapter 13 bankruptcy. Chapter 13 bankruptcy actually requires that you repay your tax debt over the life of the bankruptcy term, which is normally either three or five years. You may not be required to repay all of the tax debt, but this is determined by how the debt is classified. For example, if any of your tax debt is deemed non-priority, it will be included with other non-secured debt (like credit cards) and is only paid after the priority debt is paid. This often means that only a portion of the non-priority tax debt is repaid at the conclusion of Chapter 13 bankruptcy.

Success Tax Relief Can Help You Weigh Your Bankruptcy Options

Success Tax Relief understands the extreme financial pressure you may be under and can help determine whether bankruptcy is an option that might help you break free of your tax debt once and for all. As you have read, figuring out whether filing bankruptcy will actually help eliminate tax debt can be complicated. We can review all of your prior and current tax documentation and determine if bankruptcy is your best route out of tax debt. If so, we’ll help map out a specific plan (including timing and how to file) for you. If not, we can discuss other options that can help you reduce or eliminate your debt. Contact us today and find the relief you need!

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