While the majority of taxes cannot be eliminated through bankruptcy, some can. The bankruptcy experts at Ruesch and Reeve Law in Hurricane, Utah can examine your case to see if your tax debt can be eliminated.
In Chapter 7, almost all of a debtor’s debts are completely eliminated, and the Debtor emerges from Chapter 7 debt free. Certain debts, however, are not dischargeable in bankruptcy, including tax liabilities. Certain tax liabilities, however, may be discharged in bankruptcy.
What is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy as defined by US Courts:
“A chapter 7 bankruptcy case does not involve the filing of a plan of repayment as in chapter 13. Instead, the bankruptcy trustee gathers and sells the debtor’s nonexempt assets and uses the proceeds of such assets to pay holders of claims (creditors) in accordance with the provisions of the Bankruptcy Code. Part of the debtor’s property may be subject to liens and mortgages that pledge the property to other creditors. In addition, the Bankruptcy Code will allow the debtor to keep certain “exempt” property; but a trustee will liquidate the debtor’s remaining assets. Accordingly, potential debtors should realize that the filing of a petition under chapter 7 may result in the loss of property.” (https://www.uscourts.gov/)
In other words, Chapter 7 bankruptcy is a liquidation where the trustee collects all of your assets and sells any assets that are not exempt. The trustee sells the assets and pays you, the debtor, any amount exempted.
What Will Happen When I File Chapter 7 Bankruptcy?
In most cases, those that file Chapter 7 retain possession and ownership of their property. In Chapter 7, you are discharged of almost all unsecured debt including credit card debt, medical bills, and other similar debt where collateral has not been pledged. The discharge also includes the remaining balances on debts secured by vehicles, real or personal property or other assets surrendered to debtor’s secured creditors. The discharge usually does not include “debts for alimony and child support, certain taxes, debts for certain educational benefit over payments or loans made or guaranteed by a governmental unit, debts for willful and malicious injury by the debtor to another entity or to the property of another entity, debts for death or personal injury caused by the debtor’s operation of a motor vehicle while the debtor was intoxicated from alcohol or other substances, and debts for certain criminal restitution orders.” (https://www.uscourts.gov/)
What is Tax Debt?
Tax debt is any taxes that you owe to the IRS after the filing deadline. It does not matter if you filed your tax return before the filing deadline and paid a partial amount of your tax bill. The remaining balance is still be considered tax debt.
The main reason for tax debt in Utah is taxpayers owing more on their taxes than they expected. With the next highest reasons being back taxes and filing for divorce. Ignoring your tax debt will lead to you getting charged penalties and interest on your tax. It is likely that you will constantly be contacted by the IRS.
Will Filing Chapter 7 Eliminate My Tax Debt?
While filing chapter 7 does not guarantee elimination of tax debt, there is a chance if you qualify.
In order to qualify, all of the following conditions must be met:
- The debt is federal or state income tax debt. Other taxes, such as fraud penalties or payroll taxes, cannot be eliminated through bankruptcy.
- You did not willfully evade paying your taxes or file a fraudulent return. Bankruptcy will not help in these circumstances. Your actions need to have been lawful.
- Your tax debt is at least three years old. The original tax return must have been due at least three years prior in order to effectively file for bankruptcy.
- You filed a tax return at least two years before filing for bankruptcy. To eliminate a tax debt, a return for that debt must have been filed.
- The tax debt must have been assessed by the IRS 240 or more days before you file for bankruptcy, or must not have been assessed yet. This is called the 240 day rule. If the IRS suspended collection efforts due to a compromise or previous filing, this deadline may be extended.
How Do I File Chapter 7 Bankruptcy?
With so many exemptions, timeline restrictions, and rules; timing is very important in attempting to discharge old tax liabilities. Consult with a bankruptcy attorney at Ruesch & Reeve legal to evaluate the proper time for you to file bankruptcy. We are her to help you take advantage of the Chapter 7 discharge to eliminate tax debt.