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If you are past due on your federal or state taxes, bankruptcy may be an option for you. Filing for bankruptcy can help reduce or even eliminate some tax debt. The rules associated with bankruptcy and taxes can be complex, so it is important to understand the different requirements and procedures.

Chapter 7 Bankruptcy

Chapter 7 Bankruptcy is available to individuals or companies and is typically referred to as a “liquidating” bankruptcy, though it’s very uncommon for debtors to lose their property because you can exempt certain property with the help of your attorney. For those who have few assets and little remaining income at the end of the month, Chapter 7 is a common choice. A person can discharge their federal income debts under Chapter 7 bankruptcy if he or she meets all of the following conditions:

    • The taxes owed are income taxes;
    • The person did not commit tax fraud or willfully avoid paying their taxes;
    • The tax return for the year in question was due at least three years before filing for bankruptcy;
    • The person who owes the taxes filed a tax return at least two years before filing for bankruptcy; AND 
    • The IRS assessed the income tax debt at least 240 days before the taxpayer filed his or her bankruptcy petition (this is also known as the 240-day rule).

If your tax debt fits ALL of the above factors, it will be wiped out in bankruptcy. If not, you’ll continue to owe the taxes even after the Chapter 7 bankruptcy case. It is also important to note that a Chapter 7 bankruptcy will not avoid prior recorded tax liens. If the IRS recorded a tax lien on your property before you filed for bankruptcy, the lien will remain on the property even after the bankruptcy is completed. So, even though the bankruptcy may wipe out your personal tax obligations, and the IRS will be prevented from accessing your personal bank accounts or income, the lien on your property will still remain. Fortunately, the IRS will often work with debtors to release the lien for a significantly reduced rate since the underlying debt if the underlying tax debt was discharged.

Chapter 13 Bankruptcy

A Chapter 13 Bankruptcy is available to individuals only (not companies) and involves a three to five-year repayment plan from the person’s disposable income to their creditors. Typically, someone who has a more substantial income or has property they want to protect will choose a Chapter 13 Bankruptcy. 

In Chapter 13, the same rules in a Chapter 7 apply to the dischargeability of tax debts. If the tax debt is nondischargeable, it’s called a “priority debt” and must be paid in full over the life of your repayment plan approved by the court. If the taxes can be discharged, the tax debt is lumped into the same category of “general” claims as all other unsecured creditors. Essentially, Chapter 13 allows the individual to repay their creditors, including what taxes they owe the IRS, on a specific payment plan over three to five years. For taxpayers who have a tax debt that they cannot discharge, Chapter 13 bankruptcy may give them a more favorable payment schedule and payment amount than they would have received from the IRS.

 

Contact Wiggam & Geer, LLC: Tax and Bankruptcy Attorneys Atlanta GA

If you are facing tax debts, whether it was your fault or someone else’s, please contact Wiggam & Geer, LLC for help with your case. We’ve worked with individuals, businesses, officers, directors, shareholders, and partners in matters before the Internal Revenue Service, the Georgia Department of Revenue, and other state tax departments. Our experienced Atlanta tax attorneys can help you choose the right strategy to resolve your tax issue and help reduce your criminal exposure. You can reach us by phone at (404) 233-9800 or send us a message through our website.