Every year, hundreds of thousands of people use bankruptcy to wipe out their debt. Typically, bankruptcy can eliminate credit card debt, medical debt, unpaid utility bills, certain personal loans, and other types of unsecured debt.
But the bankruptcy court won’t necessarily discharge everything you owe.
According to the U.S. Bankruptcy Court of the Middle District of Florida, the following types of debt are non-dischargeable:
- Debts from a divorce decree/separation agreement (e.g. alimony, child support, etc.)*
- Debts caused by fraudulent conduct or willful and malicious injury to another person
- Debts caused by a death or injury resulting from your operation of a vehicle while under the influence
- Debts you did not list on your bankruptcy petition
- Government-backed student loans (with certain exceptions)
- Certain taxes and fines*
* Divorce decree/separation agreement debts and civil fines & penalties are dischargeable in a Chapter 13 bankruptcy, while they are not dischargeable in a Chapter 7 bankruptcy.
“Certain” is the keyword here if you are wondering whether bankruptcy may help you with your IRS debt. The following is an in-depth discussion regarding bankruptcy and tax debt, and whether you might be able to eliminate what you owe to the IRS through this debt-relief process.
The Automatic Stay: Temporary Tax Relief
When you file bankruptcy, the court issues the automatic stay, which halts all collection activities—even from the IRS.
The automatic stay lasts for the duration of your case, giving you several months or years (depending on which chapter you file) to either:
- Repay your tax debt in full;
- Implement a tax-relief strategy, such as an Offer in Compromise or installment agreement; or
- Obtain a court-ordered discharge of your tax debt (if your debt meets certain requirements).
Once the automatic stay takes effect, the IRS cannot contact you about your debt, seize your property, or attempt to collect it in any other way. This relief can allow you to work closely with your attorney and determine which of the above options is right for your situation.
What Types of Tax Debt Can Be Discharged?
Generally, the bankruptcy court will only discharge income taxes—not property taxes, trust fund taxes, or any other type of tax debt. To be dischargeable, you must have filed your tax return(s) for the particular year(s) you are trying to discharge. Furthermore, it must be at least three years since the taxes were due. Additionally, you must have filed the return(s) at least two years prior to filing your bankruptcy petition. Lastly, it must be at least 240 days since any assessment of the tax return by the IRS occurred before you file your bankruptcy.
Generally, Chapter 7 or Chapter 13 bankruptcies can discharge qualifying tax debts. Chapter 13 will most likely require you to include your non-dischargeable tax debt in your 3-5-year repayment plan, especially if the IRS has placed a tax lien on your property.
There are certain exceptions, however, which you can discuss with an experienced attorney.
Is It Time for You to File Bankruptcy?
One of the most important factors to consider is timing—especially when you are hoping to discharge tax debt or keep a tax refund. When you bring your case to Buchalter & Pelphrey Attorneys At Law, we can help you determine whether bankruptcy is right for you and, if so, when to file in order to maximize the benefits. If bankruptcy is not the best way to overcome your financial crisis, you can trust us to find an effective alternative that provides relief in as little time as possible.