Unfortunately for you, many tax debts cannot be discharged in bankruptcy. However, filing for bankruptcy can at least temporarily halt the IRS from attempting to collect the debt from you. Whether you are filing a Chapter 7 or a Chapter 13 also has an impact on how your tax debt is treated.
When you file for bankruptcy, whether it’s a Chapter 7 or a Chapter 13, an automatic stay is created. The automatic stay prevents most creditors, including the Internal Revenue Service, from continuing or starting any debt collection activities against you. If a creditor wants to continue trying to collect a debt, it must get permission from the court in order to legally proceed. However, when your case is dismissed, or if your debts are discharged, or if the court agrees to lift the automatic stay, the automatic stay ends and your creditors can continue attempting to collect any outstanding debts.
Although many tax debts cannot be discharged in bankruptcy, some can. Normally, older income tax obligations in which the return was due at least three years ago, the return was filed over two years ago, the IRS assessed the tax at least 240 days ago, and you were not committing tax fraud can be discharged in bankruptcy. There are some other exceptions, but in general, if a tax debt does not meet those criteria it is not dischargeable.
However, even if your tax debts cannot be wiped out, a bankruptcy could help you with your tax debts. If you file a Chapter 7, which is a discharge, and you have dischargeable debts, they will be wiped out as part of the bankruptcy. Any priority taxes that cannot be discharged will remain in place. The IRS will not be able to attempt to collect the debts while the automatic stay is in effect, but after the stay is lifted they can and probably will attempt to collect again.
If you file a Chapter 13 bankruptcy, which is considered a reorganization of debts, you can include the tax debts as part of your repayment plan. They can then be paid off over a three to five year period – whatever you work out with the bankruptcy trustee as part of the bankruptcy. The good news is that while you are making payments under the plan, the IRS will not be able to pursue the tax debts outside of the bankruptcy case. Also, you normally will receive some relief on your tax penalties.
Whether or not a bankruptcy makes sense for you to deal with tax debt depends on your particular situation. If you are in the Atlanta area, call the Atlanta bankruptcy attorneys at Holston & Huntley. Call us today at (404) 620-3337 consultations are free and you are under no obligation to use our services. We serve Metro Atlanta Georgia as well as Birmingham Alabama including surrounding areas.