Bankruptcy Questions and Answers written by a former bankruptcy attorney. These FAQs have been written as a guide for consumers thinking of filing bankruptcy or deepening there knowledge of bankruptcy
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Q. Can I discharge IRS tax debt in a bankruptcy filing?
A. The shortest answer to that question consists of two words: Yes, if . There are conditions under which a bankruptcy filing can discharge , but they are very particular. To begin with, being able to discharge depends on whether you file a Chapter 7 or Chapter 13 bankruptcy. Another important distinction is whether the tax debt is a priority claim or a general unsecured debt. In most cases, filing for bankruptcy can provide tax debt relief only in the sense that the IRS will not attempt to collect the debt until your bankruptcy is discharged. After you're out of the bankruptcy, the IRS will again be looking to collect the taxes you owe.
Q. How does a Chapter 7 filing differ from a Chapter 13?
A. There are numerous differences between the two, but the most important is that in a bankruptcy, the debtor pays nothing on unsecured debt, like . In a filing, the debtor must pay a percentage (0 to 100 percent) of the debt to the creditors. For much more on this topic read the .
Q. What is the difference between priority and general unsecured debt?
A. No priority debts are dischargeable. All must be paid in full no matter which bankruptcy chapter the debtor elects to file. Debtors must pay a percentage (0 to 100 percent) of their general unsecured debt in a Chapter 13 filing.
Q. What else will I need to pay in a chapter 13?
A. Just as you get to start over with your mortgage arrearage in a chapter 13, you may address your credit card debt and other unsecured debt like medical debt or personal loans in a new way.
Q. How can I determine whether my IRS tax debt is priority or general unsecured?
A. Your tax debt is priority if it meets either of two conditions: The filing deadline for the tax return in which you incurred the debt was within three years of the date of your bankruptcy filing. If you filed for an extension to complete your tax form, the filing deadline would be October 15, rather than April 15. The IRS assessed the tax debt within 240 days of the date of your bankruptcy filing. Note that if you have filed for an , the 240-day window may be longer. The window may be more than 240 days also if you had filed a prior bankruptcy within the 240 days. If either of those two conditions describes your case, your tax debt is priority, and must be repaid in full.
Q. So, if neither of those two conditions describes my tax debt, I could have it discharged in bankruptcy?
A. Not so fast. There also are two requirements that you must satisfy before you can discharge your tax debt in a bankruptcy. Your tax returns must have been either filed on time, or filed two years or more before you filed for bankruptcy. You must not have made any deliberate attempt to fraudulently evade paying the tax. If you meet both of those conditions, then you have the potential to eliminate a given year's tax assessment in a Chapter 7 bankruptcy, or pay less than 100 percent of it in a Chapter 13 filing.
Q. The IRS has a lien filed against my property because of my tax debt. Can I discharge that debt and eliminate the lien by filing a Chapter 7 bankruptcy?
A.Eliminating a lien and discharging the debt become different issues. If the IRS has filed a lien against your property because of tax debt, that debt is secured, and must be repaid in full, plus interest to clear the lien on the property. Note by filing bankruptcy less than 90 days from the day the lien got recorded you basically get to crush the lien. You will not be able to sell your house if it has a tax lien attached to it unless the lien gets paid as a part of the sales transaction. The IRS does not care if the money comes from proceeds of the asset sale or your bank account, as long as they get paid. Discharging personal debt in bankruptcy does not remove liens on property filed over 90 days prior to the bankruptcy. That means in some cases you may not personally owe the any longer and they may not chase you for the money personally, but you still need to pay them to sell the property. This illustrates the .
Q. What happens when the lack of equity in a property means a sale will not produce enough money to pay the IRS debt lien in full?
A. As with a mortgage, most creditors, even the IRS, recognize when their secured position will not yield them the full value of the lien. A can negotiate a release for less than the full value of the IRS tax lien so that a property can be sold.
Q. What occurs in cases where an asset sale produces zero for the IRS?
A. If you are lucky they may release the lien, it depend on the numbers and if their release might help you to pay them in other ways. It's also possible that if you come up with some money from outside of the secured asset sale they will take that as consideration for releasing the lien.
Q. Does the automatic stay associated with a bankruptcy filing stop IRS wage garnishment?
A. In the short run the automatic stay provided to the debtor by filing bankruptcy does indeed stop , but the garnishment will likely return either after the completion of the bankruptcy case, if the IRS wins a motion for relief from the automatic stay or of those who the IRS garnishment may become a part of the reorganization plan.
Q. It seems as though you have referred only to income taxes here. Can bankruptcy help eliminate other tax debts, such as payroll taxes, property taxes, etc.?
A. Income taxes such as IRS taxes due and reported on a personal 1040 income tax form represent the only IRS tax that a bankruptcy filing can eliminate or reduce.
Q. Do I need an attorney if I want to eliminate tax debt through bankruptcy?
A. While no law prevents a taxpayer from trying to eliminate tax debt through bankruptcy, the procedures and accounting involved means that those with technical knowledge and experience of such situations stand a far better chance of success. You will be better served to for tax negotiations outside of bankruptcy or a if you find that suits your personal situation better.
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