While the majority of taxes cannot be eliminated through bankruptcy, some can. The bankruptcy experts at Arietta Law can examine your case to see if your tax debt can be eliminated. Though not simple, filing for Chapter 7 bankruptcy and finding out if your debts qualify for discharge may eliminate some tax debt..
Income tax debts are generally considered priority debts and are not always dischargeable in bankruptcy. However, bankruptcy may still have an impact on your overall financial situation.
There are two main types of bankruptcy for individuals: Chapter 7 and Chapter 13.
- Chapter 7 Bankruptcy:
- In a Chapter 7 bankruptcy, some of your assets may be sold to pay off creditors.
- Certain types of debts, known as dischargeable debts, can be eliminated. However, income tax debt may not be dischargeable if it doesn’t meet specific criteria, such as the age of the tax debt.
- Chapter 13 Bankruptcy:
- In a Chapter 13 bankruptcy, you develop a repayment plan to pay off your debts over a three to five-year period.
- Income tax debts can be included in the repayment plan, allowing you to pay them off gradually.
You can wipe out or discharge tax debt by filing Chapter 7 bankruptcy only if all of the following conditions are met:
- The debt is federal or state income tax debt. Other taxes, such as fraud penalties or payroll taxes, cannot be eliminated through bankruptcy. In other words, the debt needs to be a regular tax payment that you owed either the State of Wisconsin or the federal government.
- You did not willfully evade paying your taxes or file a fraudulent return. Bankruptcy will not help in these circumstances. Your actions need to have been lawful.
- Your tax debt is at least three years old. The original tax return must have been due at least three years prior in order to effectively file for bankruptcy. So if you were to file for bankruptcy in April 2020, for instance, this would apply to your 2017 taxes that were due April 15, 2018.
- You filed a tax return at least two years before filing for bankruptcy. To eliminate a tax debt, a return for that debt must have been filed. Generally, if your extensions expired and you filed late, you have not filed a true return and will not be able to eliminate the tax debt.
- The tax debt must have been assessed by the IRS 240 or more days before you file for bankruptcy, or must not have been assessed yet. This is called the “240 day rule.” If the IRS suspended collection efforts due to a compromise or previous filing, this deadline may be extended.
California has specific rules and nuances that may affect the dischargeability of income tax debt. Here are a few points that are relevant to California:
- California Exemptions:
- California has its own set of exemptions that determine what property you can keep in bankruptcy. Understanding these exemptions is crucial, as they can affect the overall outcome of your bankruptcy case.
- California Homestead Exemption:
- California has a generous homestead exemption that allows you to protect a certain amount of equity in your primary residence. This exemption could impact the liquidation of assets in a Chapter 7 bankruptcy.
- Community Property Rules:
- California is a community property state, and this can have implications for the treatment of assets and debts in bankruptcy, especially if you are married and filing jointly.
- State Tax Agencies:
- In addition to federal income taxes, you may also have state income tax debt in California. The rules for discharging state income tax debt can differ from federal rules.
- Specific State Regulations:
- California may have specific regulations or court decisions that impact the dischargeability of debts. Consulting with a local bankruptcy attorney who is familiar with California laws is advisable.
For the most accurate and current information regarding the discharge of income tax debt in California, it’s essential to consult with a knowledgeable bankruptcy attorney who practices in the state. Give us a call at (925) 472-8000 today. We can provide guidance based on the latest laws and help you navigate the specific requirements relevant to your situation.
Tax Liens & Bankruptcy
Tax debt and tax liens are different things. Tax debt is simply money that you owe either the State of Wisconsin or the IRS. A tax lien is a legal judgment secured against your property to satisfy a tax obligation that you owe the state or federal government. Should you qualify for Chapter 7 bankruptcy, and meet all of the above criteria, unfortunately bankruptcy will not eliminate prior tax liens.
Your obligation to pay off the debt will be discharged, but not eliminated. However, the IRS will no longer be able to go after your income or bank account.
However if a tax lien was filed before you filed for bankruptcy, the lien will remain on the property. If you ever want to sell your property, you will have to pay off the lien before you can do so.
Do you have other tax related, or bankruptcy questions? Let us know. We’re happy to help.