People with debt problems often think that their tax debt will never be forgiven in bankruptcy proceedings, but this is not true. Some types of taxes cannot be forgiven, but others can be discharged under certain circumstances. 

Not all tax debt is treated the same way

Under the Bankruptcy Code, there are various types of tax debts. While income tax debts that meet certain criteria can be discharged, other tax debts, such as payroll tax or fraudulent tax debts, cannot be discharged.

It is necessary to know the age of the tax debt, whether the tax return has been filed, and whether the tax debt has been assessed by the IRS before a tax debt becomes dischargeable. 

The three key timing rules

To be eligible for discharge under Chapter 7 bankruptcy of any income tax liability, the following conditions regarding timing usually need to be fulfilled:

• The three-year test – The tax return due date should be at least 3 years before the bankruptcy filing date.
• The two-year test – The tax return should have been filed at least 2 years before bankruptcy filing.
• The 240-day test – The assessment of tax liability by the taxing authority should occur at least 240 days before the filing of the bankruptcy case.

These conditions must be met for the tax liability to be discharged, provided there is no evidence of tax fraud.

How tax liens affect bankruptcy

Even if income tax debt can be discharged, pre-existing tax liens could pose problems. A tax lien refers to the government’s right to a claim on your property. Although your debt can be discharged in the process of filing for bankruptcy, the existence of the tax lien will remain as is. 

The government may thus still have claims on your property notwithstanding the debt having been discharged.

Chapter 7 versus Chapter 13

Chapter 7 and Chapter 13 bankruptcy are both means by which you can get relief from taxes, but they are distinct in their own ways.

Chapter 7 is all about discharging your eligible debts. In case your tax debts are eligible for discharge under certain terms and conditions, then Chapter 7 can provide you with speedy relief from your finances.

In Chapter 13 Bankruptcy, you will have to repay your debts in the course of three to five years. Tax debts that are not eligible for discharge under Chapter 7 can be paid off through the repayment plan provided under Chapter 13.

People with huge tax debts can benefit immensely from Chapter 13 Bankruptcy.

Seek guidance before filing

Tax debts and bankruptcy laws are complicated and often depend on your personal situation. Filing at the wrong time might mean that your tax debts stay fully collectible, whereas missing some deadline will make things easier for you to receive relief.

In case you have problems with taxes and other debts, contacting a professional bankruptcy lawyer will give you the opportunity to learn what options you have. An evaluation of your tax status and all your financial issues will help determine whether filing for bankruptcy can be beneficial for you.

Talk to a Danville, IN, Bankruptcy Lawyer Today

Chris Arrington represents the interests of Indiana residents who need to file for bankruptcy. Call our office today to schedule an appointment, and we can begin discussing your next steps right away.