In today’s economy, it is not uncommon for people to find themselves in debt.
If you cannot pay your taxes, you may be considering bankruptcy as a way to discharge your tax debt.
But can taxes really be discharged in bankruptcy?
The answer is yes…but there are a few things you should know first.
Keep reading to learn more about discharging taxes in bankruptcy and whether or not it could be the right option for you.
What to do if you can’t pay your taxes?
If you’re unable to pay your taxes, don’t panic.
There are many options available to you.
First, you can contact the IRS and request an extension. This will give you additional time to raise the money you need to pay your taxes.
You can also set up a payment plan with the IRS. This will allow you to pay your taxes over time in smaller installments.
If you’re still unable to pay your taxes, you may be able to qualify for a hardship waiver. This waiver will allow you to make reduced payments based on your current financial situation.
If you really feel like you can’t afford to pay, you may want to consider bankruptcy. Bankruptcy can be a viable option for those struggling to pay their taxes.
But it’s essential to understand how bankruptcy works before you make a decision.
Whatever option you choose, it’s important to act quickly.
The sooner you take action, the better off you’ll be.
- Consider reading: How to save money when you are broke? – 10 Tips
What is bankruptcy?
Bankruptcy is a legal process that provides debt relief for individuals and businesses unable to repay their debts.
In most cases, bankruptcy allows borrowers to discharge their debts and restart their financial lives with a clean slate.
There are several types of bankruptcies, each of which has its requirements and rules.
The most common types of bankruptcies are Chapter 7 and Chapter 13.
Chapter 7 bankruptcy allows borrowers to discharge unsecured debts, such as credit card debt and medical bills.
Chapter 13 bankruptcy, on the other hand, requires borrowers to repay a portion of their debts over three to five years.
After completing the repayment plan, the remaining balance of the borrower’s debts is discharged.
Bankruptcy is a complex process, and borrowers should consult with an experienced bankruptcy attorney to determine which type of bankruptcy is right for them.
What is a dischargeable tax debt in bankruptcy?
A dischargeable tax debt in bankruptcy is a debt that can be eliminated through the bankruptcy process.
This type of debt includes income taxes, property taxes, and other taxes that are owed to the government.
To have tax debt discharged in bankruptcy, the debtor must prove that they meet certain conditions, such as proving that they cannot pay the debt and that the debt is not dischargeable under any other bankruptcy code provision.
If a debtor meets these conditions, the tax debt will be discharged, and the debtor will no longer be liable for payment.
However, it is essential to note that not all tax debts are dischargeable in bankruptcy.
For example, student loans and child support payments are not dischargeable.
Therefore, it is essential to consult with an experienced bankruptcy attorney to determine which debts can be discharged through bankruptcy.
- Consider reading: Why are taxes important?
Can taxes be discharged in bankruptcy?
The answer is that it depends.
Generally speaking, most taxes are not dischargeable in bankruptcy.
This includes federal, state, and local taxes.
However, there are some exceptions.
For instance, if the taxes are more than three years old and you can prove that you did not commit fraud or evaded paying taxes, they may be discharged.
Additionally, if you can prove that paying the taxes would create an undue hardship, they may also be discharged.
Ultimately, whether or not your taxes can be discharged in bankruptcy will depend on the specific circumstances of your case.
If you have questions about your particular situation, it is best to consult with a qualified bankruptcy attorney.
- Consider reading: Why are taxes not taught in school?
How to determine if your tax debt is dischargeable?
One of the first things you should do if you think you may have a tax debt that could be dischargeable is to consult with a tax professional.
They will help you understand the requirements and determine if your debt meets the criteria.
Generally, to have tax debt discharged, it must be at least three years old, you must have filed your taxes on time for at least two years before filing for bankruptcy, and you must not have attempted to evade payment fraudulently.
Additionally, only certain types of taxes are eligible for discharge, so it’s essential to ensure that your debt meets all the requirements.
If you’re unsure whether your tax debt is dischargeable, a tax professional can help you understand your options and make the best decision for your situation.
How to get a tax debt discharged in bankruptcy?
Like other types of debts, tax debts can be discharged in bankruptcy.
To get a tax debt discharged, you must file for bankruptcy and include the tax debt in your bankruptcy petition.
You will also need to prove that the tax debt meets certain criteria, such as being more than three years old or being related to an income tax return that was filed at least two years ago.
Once you have filed for bankruptcy, the court will review your case and determine whether or not to discharge your tax debt.
If the court decides to discharge your tax debt, you will no longer be responsible for paying it back.
However, if the court denies your request to discharge the debt, you will still be responsible for repaying the full amount of the tax debt, plus interest and penalties.
- Consider reading: 7 Ways to make the most with your tax refund
The effects of discharging tax debt in bankruptcy
The decision to file for bankruptcy is never an easy one.
However, for some taxpayers, it may be the best option for dealing with overwhelming tax debt.
When taxpayers file for bankruptcy, all of their outstanding debt is discharged.
This includes some tax debt that they may owe.
While this may seem a relief at first, there are some potential drawbacks to consider.
One of the most significant drawbacks is that taxpayers will no longer be able to deduct any interest or penalties from their taxes.
This can add up to a significant amount of money over time.
The discharge of tax debt in bankruptcy will also stay on the taxpayer’s credit report for seven years.
This can make it difficult to obtain new lines of credit or finance a major purchase.
Finally, the IRS may still attempt to collect any unpaid taxes through wage garnishment or levies on assets.
As a result, it is important to speak with a qualified tax professional before filing for bankruptcy.
What happens if your taxes are not dischargeable?
If your taxes are not dischargeable, you will be responsible for paying them in full.
This means that you will need to continue making payments to the IRS or state tax agency and may also be responsible for penalties and interest.
Sometimes, the IRS may even place a lien on your property.
If you cannot pay your taxes, it is important to contact the IRS or state tax agency as soon as possible to discuss your options.
You may be able to negotiate a payment plan or offer a compromise, which would allow you to settle your tax debt for less than the full amount owed.
However, it is important to understand that if your taxes are not discharged, you will still be responsible for paying them in full.
Alternatives to bankruptcy for resolving tax debts
Filing for bankruptcy is often seen as a last resort for resolving tax debts.
However, it is important to understand that alternatives to bankruptcy may be more effective in resolving your tax debt.
One alternative is negotiating with the IRS to set up a payment plan.
This option can be beneficial if you cannot simultaneously pay your full tax debt.
Another alternative is to request an Offer in Compromise from the IRS.
This option allows you to settle your tax debt for less than the full amount owed.
It is important to note that not everyone will qualify for an Offer in Compromise.
Finally, you can consider selling assets to pay off your tax debt.
This option may be beneficial if you have assets that are worth more than the amount of your tax debt.
Of course, these options are not available to everyone, and you will need to meet certain criteria to be eligible.
It is important to consult with a tax professional before deciding how to resolve your tax debt.
- Consider reading: If you own state taxes, can they suspend your licence?
Although not all taxes can be discharged in bankruptcy, there are still some ways to get relief from your tax debt.
Please get in touch with an experienced bankruptcy attorney for help if you struggle to pay your taxes.
Other options may be available to you, such as an offer in compromise or installment agreement.
Bankruptcy should always be considered a last resort, but it is important to know all of your options before making any decisions.