Bankruptcy is a last resort for many Americans. A number of different factors can result in making the difficult decision of filing bankruptcy. One of the factors in taking the bankruptcy plunge is tax debt. Many commercials offer the hope of eliminating tax debt in bankruptcy. However, you should be cautious of these promises because it is not as simple as it sounds.
Most tax debt cannot simply be wiped out in bankruptcy. You will still owe most types of tax debts at the end of a Chapter 7 bankruptcy case. It is best to first consult with an experienced Central Valley bankruptcy attorney before you take any actions.
When a Tax Debt Qualifies for Discharge
If you are facing serious tax debt, Chapter 7 bankruptcy will be the better option. However, a tax debt discharge will only work if the tax debt qualifies for discharge and you qualify for a Chapter 7 bankruptcy. The following conditions must be met in order for you to wipe out federal income tax debt in a Chapter 7 bankruptcy filing:
- Your tax debt is for income taxes. Bankruptcy will never eliminate taxes other than income, such as payroll taxes or fraud penalties.
- You are not charged or have not been convicted of fraud or willful tax evasion. Bankruptcy will not help if you filed a fraudulent tax return or evaded willfully or intentionally avoid paying taxes.
- Your tax debt is at least three years old. Your tax return must have been originally due more than three years before filing for Chapter 7 bankruptcy.
- You filed a tax return. If you plan on filing bankruptcy in order to discharge tax debt, you must have filed a tax return for that debt.
- You pass the “240-day rule.” The IRS must have assessed the income tax debt at least 240 days before you file your bankruptcy petition, or not at all. This time limit could be extended if the IRS suspended collection activity because of an offer in compromise or a previous bankruptcy filing.
Prior Recorded Federal Tax Liens Are Not Dischargeable
It is important to note that even if you satisfy the above requirements of qualifying for a Chapter 7 bankruptcy and your taxes qualifying for a discharge, your victory may nevertheless still be bittersweet. The reason is that bankruptcy will not wipe out prior recorded tax liens.
In other words, Chapter 7 will discharge your personal obligation to pay the qualifying tax debt and prevent the IRS from going after you for it. However, if the IRS has already recorded the tax lien on your property before you filed for Chapter 7, the lien will still remain on your property and must be satisfied before selling your property.
Call an Experienced Central Valley Bankruptcy Attorney
If you are considering Chapter 7 bankruptcy, it is in your best interest to consult with an experienced bankruptcy attorney to help you learn your legal rights and options, especially with respect to Chapter 7 bankruptcy.