Personal Income Taxes and Chapter 7 Bankruptcy

Over 1.21 million Americans will file for bankruptcy this year, and more than half of that number will include personal income taxes into their bankruptcy petition. Many individuals and bankruptcy attorneys believe taxes will automatically discharge in a bankruptcy upon the final discharge date. This is not immediately the case, there are parameters to determine the discharge status of your personal income taxes. This is especially true in a Chapter 7 case, where, depending on when you filed your bankruptcy can determine the outcome of debt due.

PETITION

Notifying your attorney of all tax debts is necessary, as your attorney will enter the information to appear on the docket. Without this proper notification, the taxing authority may not be aware you are filing bankruptcy, assessing liens and executions against you, which may include garnishment. While, a bankruptcy places these items at a halt, an unaware creditor will still process the information for collections.

THREE YEAR RULE

With proper knowledge of taxes, the taxing authority has the exception of the Three-Year Look Back Rule, which determines if your tax period is discharged. For example, if you filed bankruptcy in 2013, and have an old tax period from 2004, that filing was due April 16, 2005. Count three years, and that equals 2008. This means as long as you have filed the tax return timely and happened not to pay it, the 2004 tax period will be discharged. This can be confusing, and it is urged you discuss the Three-Year Look Back Rule with your attorney.

FILING

Filing your tax returns is essential, regardless you have the resources to pay them or not, filing them timely can mean the difference between a discharged tax liability or a reactivated debt. Under bankruptcy tax law, not filing your taxes creates an estimated assessment and estimated assessments are not discharged in a Chapter 7. If you have not filed a taxing period, you can review holding off filing bankruptcy until your taxes have been filed and work with the Three-Year Look Back Rule as stated above.

PROCEEDING

If you are filing bankruptcy for additional reasons outside of taxes, and must proceed, understand no taxing authority can collect against you during the stay of your bankruptcy. This buys you a few months to adopt a plan. Consider hardship payment plans, or many agencies have a section called Offer-in-Compromise for settlements. Reviewing all facets of taxes due with your attorney is necessary to determine the best outcome for your financial situation and intended bankruptcy discharge goals.

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