Life happens! Divorce. Job loss. Serious illness. These are life events that can cause financial hardship and force good honest folks to file for bankruptcy. Those who have struggled with an endless stream of expenses that never end often owe income taxes that just will not let them be.
Taxes are a part of life. This is true after bankruptcy. Before filing your income tax returns when there has been a bankruptcy, it’s important to know things. Many people have either partial or incorrect information whether and how bankruptcy could help.
The following information may help you get a few things straight and find the best choice for you:
Bankruptcy Can Write Off Income Tax Debts
Despite common misperception, income taxes in bankruptcy are dischargeable:
The taxes are three years old, the related return filing date was at least two years ago, any assessment was greater 240 days ago and the taxpayer did not engage in fraud or tax evasion. There are several reasons these time periods extend, so do not rely on the above alone to decide if the taxes are dischargeable.
Which Bankruptcy Should You File? Chapter 7 vs. 13
The differences between these two follows:
- Chapter 7 comes with income and property ownership limitations, it eliminates qualifying and unsecured debts which include tax debt,
- Chapter 13 allows the filer to keep higher valued property by reorganizing debt over a 3 to 5 years, part of the debt gets paid to the creditor. Any remaining debt gets discharged after this time.
Further, Chapter 13 is in the repayment plan, allowing you flexibility in re-paying your past due-taxes in a more extended time.
Timing is everything in life and bankruptcy. Smart pre-bankruptcy planning can increase the sum of income taxes you can discharge when you file your bankruptcy case. The best advice is to wait until more of your taxes are dischargeable to file for bankruptcy. It’s not as easy in praxis as in theory, for these two reasons:
Often you face pressure from other creditors to file for bankruptcy, “whether you are paying creditors to keep them happy or because they are forcing payment by suing and garnishing your paychecks and such.” There is always the possibility of finding out you can’t discharge a tax you were expecting to if you wait too long.
Have questions? Contact Keith Jones.
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