Bankruptcy is traumatic no matter what the circumstances are. But when you have a situation that combines unpaid taxes with bankruptcy, it can be utterly overwhelming. IRS-related fines, tax debts, and various liens combined with interest, penalties, and all the other fees that add up can be devastating not only to your pocket but also to your morale.
Many people don’t realize that tax debt and all the IRS liens that go with it can be erased. But it has to be done the right way, according to the law. That’s why you need an experienced bankruptcy attorney to help you. It isn’t always possible to erase tax debt completely, but it is certainly possible to substantially reduce the amount owed.
The first question is whether Chapter 7 or Chapter 13 bankruptcy is the best route to take. Unfortunately, there is no failsafe answer to this question. Every situation is different, and there are numerous factors that will need to be taken into account. These include future financial plans of the person who is planning to file for bankruptcy, as well as retirement protection and asset retention if relevant. There are no simple solutions, but in spite of what some people say, it is possible in some circumstances to totally erase your tax debts.
Options to Erase Tax Debt with Georgia Bankruptcy
Individuals and married couples opting for bankruptcy in Georgia have two options:
- Chapter 7 that is basically a form of liquidation that requires the debtor to give up property exceeding the limits or exemptions allowed in the state so that creditors can be paid as much as possible. The general idea is to discharge all debts and start out with a clean slate.
- Chapter 13, a form of debt adjustment that involves a payment plan that usually covers a portion of what is owed. This requires the debtor to be employed or to have an income of some sort to ensure he or she is able to make the repayments on an ongoing basis.
A Chapter 7 is attractive to many people, and is usually the way to go if you need to wipe out old income tax debts. However, if you are paying off a mortgage or loan on a car, it may not be a sensible choice because car loan creditors and mortgage holders may invoke their right to repossess the car and/or house to cover what you owe. A Chapter 7 bankruptcy does though allow debtors to keep all property covered by legal exemptions – usually the value of the equity you have in these items.
A Chapter 13 is a much better option for people who are in danger of losing cars or their home, or any other valuable property that is not covered by the Georgia exemptions. But when it comes to tax debts, these will need to be included in the repayment plan.
Chapter 7 and Tax Debts
While it is possible to discharge some income tax debts, there are various limitations, qualifications, and restrictions to consider. For example:
- The taxes must be income-based and either for state or federal income tax, or for tax due on gross receipts.
- Taxes must relate to tax returns that were due at least three years prior to filing for bankruptcy – and this includes any extensions she may have been given.
- The tax return or returns must also have been filed at least two years before filing. Late returns don’t count, which means that if your extension expired and the Internal Revenue Service (IRS) filed the tax return for you won’t be able to discharge the taxes due.
- The assessment of taxes must have been done at least 240 days (about eight months) before you file for bankruptcy.
- There cannot be any form of tax evasion or fraud involved.
Taxes that generally won’t be discharged in a Chapter 7 bankruptcy include property taxes, employment taxes of various types, and non-punitive penalties on tax that occurred within three years of filing.
Chapter 13 and Tax Debts
Since Chapter 13 requires a repayment plan, if there are tax debts these will be included in the plan. Repayment plans generally last for a period of between three and five years.
Whichever type of bankruptcy you eventually opt for, the IRS has to stop most of its attempts to collect taxes from you once you have filed. This will only be a permanent reprieve if the tax debts can either be paid in the bankruptcy (Chapter 13) or discharged (Chapter 7).
This discussion of how to erase tax debts is simplified, and there are many other issues to be considered. For this reason it is vital for you to consult with a professional bankruptcy attorney before making any decisions.
If you live in Georgia and are faced with bankruptcy, contact the team at C. Golden & Fleming, LLC for guidance. There’s a good chance we can help with your IRS tax debts too!