Some of the most common questions we hear at our Sacramento bankruptcy office are centered on how bankruptcy affects tax debts. It’s not surprising that individuals want to know how filing a Chapter 7 or Chapter 13 bankruptcy will affect those tax debts imposed by the IRS. The good news is that in certain situations, you can discharge tax debt using Chapter 7 bankruptcy, and in other situations you can gain additional time to pay back taxes using Chapter 13 bankruptcy.
Discharge Tax Debt
As aforementioned, certain types of taxes can be discharged if they meet certain criteria. Chapter 7 bankruptcy is typically a much more efficient way of discharging or wiping out tax debts, but not everyone will qualify for Chapter 7 bankruptcy protection. If you are able to pass the “means test” and become approved to proceed with a Chapter 7 bankruptcy filing, your tax debt will only be discharged if:
- The tax debt is three tax years old or more.
- You have filed your tax returns at least two years ago for the tax year in question.
- The IRS assessed the tax debt more than 240 days ago.
- The tax debt you owe is income tax and not payroll tax or other type of tax.
Automatic Stay and Tax Debt
When you file for either type of bankruptcy in California, you receive what is called an “automatic stay”, which prohibits creditors from continuing any collection activities. The automatic stay can also stop foreclosures, repossessions, utility disconnections, and in some cases, tax liens. It’s important to note that an automatic stay will not prevent tax liens that are associated with property taxes due after your bankruptcy filing, or liens associated with taxes that cannot be discharged in bankruptcy. Additionally, an automatic stay is only a temporary relief from IRS tax collection activities, and the IRS must be properly notified of your bankruptcy filing by listing them as a creditor on your bankruptcy forms. The key to avoiding tax liens is to file BEFORE the lien is recorded, as even Chapter 7 bankruptcy will not eliminate existing liens. What Chapter 7 bankruptcy can do is wipe out your personal obligations to pay the tax debt and keep the Internal Revenue Service from garnishing your wages. Tax liens can be avoided or reduced in chapter 13 bankruptcy when the value of your property is worth less than the amount of the tax liens.
Tax debt is no simple matter; the IRS has many tools that it employs to get the money owed to it. If you live in the Greater Sacramento, California area and are burdened with tax debt that you can’t seem to pay down, a bankruptcy attorney in Sacramento will usually offer a free consultation and have the experience in debt relief to afford you different options on how to free yourself of tax debt, or if nothing else, give you extra time to pay back the tax debt owed over an extended time period.