Bankruptcy can be effective in eliminating or reorganizing debt. When your debt becomes too much of a burden to bear and you want to make it more manageable, you might consider filing for bankruptcy relief. Despite what you may think, even some government tax debt may qualify for discharge under a Chapter 7 bankruptcy. Tax debt may also qualify for inclusion in a Chapter 13 debt repayment plan. Unlike the process for most consumer debts, the bankruptcy rules for taxes are more stringent.
Not all tax debt will qualify for bankruptcy. In addition, timing is equally important. To ensure you receive the benefits of bankruptcy, you must file your petition timely. An experienced Arkansas bankruptcy attorney knows the Bankruptcy Rules and can help you navigate through the complicated process.
Chapter 7 eliminates some tax debt
There are three rules governing tax debt in the Bankruptcy Code. Tax debts that meet all of the following criteria may qualify for Chapter 7 liquation to erase your debt.
- 3-Year Rule: The debt must originate from a tax return at due at least three years before you file bankruptcy
- 2-Year Rule: You must have filed your tax return at least two years before you initiate bankruptcy. If the IRS filed a substitute return for you, it does not count
- 240-Day Rule: The IRS made an assessment of your tax liability at least 240 days before you file bankruptcy
- Only income taxes: Other taxes such as payroll taxes or penalties on taxes will not be discharged
Other exceptions to income tax discharge
If you willfully evaded or attempted to evade paying taxes or committed fraud on your tax return, the bankruptcy court will not discharge your income tax debt. In addition, any tax liens that were recorded prior to you filing bankruptcy may survive a bankruptcy discharge, to the extent of the equity in the property.
Repay tax debt through Chapter 13 plan
Income taxes that meet the above criteria may also qualify for repayment through a Chapter 13 repayment plan. Sometimes, bankruptcy can force the IRS to agree to more favorable terms than those outside of the bankruptcy process. This could include a longer pay off period — three to five years — and, in some instances, a repayment of less than the full amount of the debt you owe.
For more information on eliminating tax debt, contact the Law Offices of Craig Cook. We patiently guide you on the road to financial recovery and give you the tools you need to avoid going into future debt.
