Debt and Your Taxes
Taxes can present an unwelcome burden for those who are struggling financially. Not only do taxes strip away from your weekly earnings, but once a year, you have to bite the bullet and file your tax return.
If your withholding amount was too high the previous year, you may enjoy a nice windfall and be able to pay down debt or treat yourself. But many people choose to get more in their paycheck in order to make ends meet, and end up owing the IRS.
Tax debts can be difficult to deal with, especially because the IRS is more powerful than most creditors. If you owe tax debts, you can speak with a bankruptcy attorney in your area to learn about your rights and options. Connect today for a free, no-obligation consultation.
Filing for personal bankruptcy can help you get relief from a variety of financial burdens, but some debts are non-dischargeable (that is, they cannot be excused) in bankruptcy court. Here’s a look at what you need to know about how filing for bankruptcy might work if you owe money to the Internal Revenue Service.
Can Bankruptcy Eliminate My Tax Debt?
The short answer is no. But the long answer is complicated and may depend on where you live, what kind of property you have, how old the taxes are, and which type of personal bankruptcy you choose (Chapter 7 or Chapter 13). Here are some basic pieces of the bankruptcy and IRS puzzle:
- Recent tax debt is non-dischargeable. This means, in most cases, filing for bankruptcy will not excuse you from paying any tax debts you owe. However, bankruptcy might still help you because it could excuse other debts and thus free up enough money to cover your tax obligation. Also, if the tax debt is at least three years old, you may be able to include it in either a Chapter 7 or Chapter 13 filing.
- If you still can't pay your tax debt. In some cases, a filer cannot afford to pay her tax debt after filing for bankruptcy. If you fall into this category, you may be able to negotiate with the IRS, either by arguing your doubtful liability (that is, that you don't owe a significant amount of money) or doubtful collection (that is, that you don't have enough money to cover the debt, even if the IRS pursued it).
- What role does the IRS play in a Chapter 13 bankruptcy filing? Those who file Chapter 13 bankruptcy will enter a three- to five-year repayment plan that allows them to distribute money to all their creditors. If the IRS is one of your creditors (i.e. you owe money on taxes), it has no more power than any other creditor to approve or disapprove of the terms of your repayment.
Will Bankruptcy Affect What I Pay the IRS in Taxes?
One important thing about bankruptcy and taxes is that you do not have to pay taxes on debts discharged during bankruptcy. In other words, the amount of debt for which you receive your discharge is not considered taxable "income" by the IRS—which is not often the case with other forms of debt relief.
Further, filing for bankruptcy may help you settle a tax dispute. Because the bankruptcy court has the authority to settle conflicts between debtors and creditors, it can help determine a fair repayment amount for a debtor who files for Chapter 13 bankruptcy.
Find out How Bankruptcy Could Affect Your Finances
Both tax law and bankruptcy law are complex legal arenas, and to find out whether filing for bankruptcy may be a wise decision for you and your finances, you may want to consult a bankruptcy lawyer practicing in your area.
Speaking with a bankruptcy lawyer may give you a better idea of the specific ways that bankruptcy might protect you. Get started today—simply fill out the free case evaluation form below to connect with a bankruptcy lawyer near you.