When your financial situation is getting out of control, it’s easy to forget about tax debt.
While Credit Cards may be front and center on your mind it is still important to be aware of any outstanding tax liabilities. When the Internal Revenue Service (IRS) and New York State Department of Taxation and Finance come knocking on your door, they’re not playing games. They take tax debt very seriously.
Does bankruptcy clear income tax debt? There’s a lot of nuance to this issue. And we’re going to explore the need-to-know facts in the article below. Keep reading.
Taxes are tricky — especially when you bring bankruptcy into the mix. For guidance to see you through this difficult financial situation, reach out to the experienced attorneys at Jacoby & Jacoby.
Income Tax Discharge in Chapter 7 Bankruptcy
If you’re looking for a way to clear income tax debt in bankruptcy, Chapter 7 bankruptcy is likely your best opportunity.
In case you’re not familiar, Chapter 7 is the liquidation where the vast majority of your outstanding debt is effectively wiped out and discharged. In order to determine if you qualify for a Chapter 7 Bankruptcy we first have to analyze your household size and household income.
If you do qualify for a Chapter 7 Bankruptcy, there’s a chance it will clear your income tax debt. But keep in mind that this is no guarantee.
The following conditions must be met in order to discharge income tax debt with Chapter 7 bankruptcy:
- The IRS assessed the income tax debt at least 240 days before you filed for bankruptcy.
- At least two years before filing for bankruptcy, you filed a tax return that includes the income tax debt you would like to have discharged.
- The income tax debt is from at least three years ago.
- You didn’t commit tax fraud or any similar crime in order to avoid paying the income tax debt in question.
If your case meets these conditions, you may be able to clear income tax debt through Chapter 7 bankruptcy.
Repaying Tax Debt in Chapter 13 Bankruptcy
What about Chapter 13? Does Chapter 13 bankruptcy clear income tax debt?
Chapter 13 won’t likely clear income tax debt in the same way Chapter 7 can, but it can still help.
As a reminder: Chapter 13 bankruptcy is the one where you reorganize your debts and repay them on a monthly basis for a three- or five-year period. At the end of the repayment period, the remainder of your debts will be discharged.
Chapter 13 won’t eliminate your tax debt per se, but it can make it much more manageable to repay. The repayment play you create for Chapter 13 bankruptcy will be reasonable based on your income.
Will Bankruptcy Clear a Tax Lien?
A tax lien is entirely different from a tax debt. With a tax lien, a legal judgment has been secured against your personal property in order to satisfy an outstanding state or federal tax debt. If there’s a lien on your house, you can continue to live in it, but you won’t be able to sell it.
So, what happens when you file for bankruptcy? Usually, not much will happen to your tax liens.
Most tax liens stay in force despite any bankruptcy filing. However, there are some rare exceptions. These usually involve tax liens that are more than a decade old or those that involved some sort of mistake when the lien was filed.
A qualified attorney from Jacoby & Jacoby can help you understand what will happen to any existing tax liens if you file for bankruptcy. And if there’s a possibility of getting them removed, we can help make it happen.
Meet With Top Long Island Bankruptcy Attorneys Today
If you are hoping to clear outstanding income tax debt, declaring bankruptcy could help. However, many factors could influence the actual outcome in your bankruptcy case. That’s why it’s so important to speak with an experienced bankruptcy attorney.
Make sure you understand what to expect after you declare bankruptcy and how to give yourself the cleanest possible financial slate. Reach out to New York’s No. 1 bankruptcy filer, Jacoby & Jacoby, for a confidential case review.
Give our team a call at 888-452-2629 or contact us online to start setting yourself up for a better financial future.