Income Tax Debt In Bankruptcy
There are two ways in which income tax debt is handled in bankruptcy. It is either discharged (no more liability) or it survives and must be paid.
Tax Debt In Chapter 7
In a Chapter 7 bankruptcy, tax debt is discharged if it was due more than 3 years from the date of your bankruptcy filing. For example: Say you were to file a Ch7 bankruptcy today, October 9, 2018. Any back tax debt for a filing April 15, 2015 and older is dischargeable. If however you filed an extension, then you would need to wait until October 15, 2018 to discharge tax debt for 2015.
Another exception to the above is the 240 day rule. This rule applies when you file a your taxes late. For example: Say you file your 2015 taxes January 1, 2016. This means that you would not be able to discharge your 2015 back taxes until August 1, 2016 (240 days from the date you file).
If your tax debt is not dischargeable, filing a Ch7 is still beneficial as you can discharge any penalties and interest on past tax debt.
Tax Debt In Chapter 13
There is another option for tax debt that is not dischargeable. You can file a Ch13 and pay off the full amount you owe in a 3 or 5 year plan. The benefit to this avenue is that you can stop penalties and interest and make one monthly payment toward the full balance. What determines whether you are in a 3 or 5 year plan is dependent on whether you are an above median income earner for your family size and also what your total tax debt is.
Tax Debt In a Chapter 20
Chapter 20 is when you file a Ch7, then a Ch13. Why would one do this? Say you have other credit card in addition to non-dischargeable tax debt. What you can do is file a Ch7 to get rid of your credit card debt. After you receive your discharge, you can then file a Ch13 to pay off the tax debt. The benefit is to get rid of the credit card debt and not have to pay it in a Ch13.
The discussion above is just a brief overview of tax debt in bankruptcy. Each particular person’s eligibility to file a bankruptcy to get rid of tax debt is very different. If you would like to learn more, please contact us and set up an appointment today.
Stay tuned next time for a blog on how bankruptcy can deal with various other tax issues from property tax to business related tax debt.
***the information on this page is not legal advice.