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Will Bankruptcy Clear My Tax Debts?

Will Bankruptcy Clear My Tax Debts?

Many people think bankruptcy is a cure-all for their debts. In many cases, however, this is not the case. Yes, the money you pay on your tax debt is unique, and you will have to deal with it in a particular way when filing for bankruptcy.

Bankruptcy is a help for people, and irrespective of your debt, you can file for it. Many people that owe back taxes do consider it, and indeed, bankruptcy might make a way out of your debt issue.

We have compiled this information to allow you to understand what will become of your tax debt when you go for bankruptcy.

Can You File for bankruptcy on taxes?

Without a doubt, filing for bankruptcy might reduce or eliminate your back taxes and other debt you owe the IRS. This includes both federal and state taxes, which could be discharged via bankruptcy. Your tax debt status is a factor of your financial situation and the type of bankruptcy you file for. 

This brings us to the type of bankruptcy and how they affect your tax debts.

Tax Debts and Chapter 13 Bankruptcy 

There is the option for chapter 13 bankruptcy. This typically involves getting the court to allow you to make your payments in partial installments. This means that you will not pay the entire tax debt, but part of it in exchange for the remaining plan. A little part of what you pay will be used to take care of the IRS and the tax office of your state of residence.

The implication of this is that with chapter 13, you will not have to pay your entire tax debt in full to settle the IRS.

Tax debt and Chapter 7 bankruptcy

This is not as straightforward as chapter 13 bankruptcy. The only way in which your tax debt can be discharged is if you meet the following condition:

  • Your tax debt is at least three years’ old

  • The tax debt you owe is income tax

  • Two years before you filed the bankruptcy, you have filed tax in two years

  • Uncle Sam has accessed your tax debt for at least 240 days before the bankruptcy process

  • You are not guilty of tax fraud or deliberate tax evasion

As long as you meet the five conditions above, you are qualified to discharge your tax debts through chapter 7 bankruptcy. Interestingly, this bankruptcy will also get rid of interest and penalties from the debt. 

You, however, cannot discharge other taxes (like payroll tax) with a bankruptcy. The penalties alongside the interest that those taxes generated also will not be removed. With this, if you file for bankruptcy and you owe other debts, you must repay the other debts.

Liens cannot be Eliminated via Bankruptcy Discharge.

The debt discharge you will enjoy after bankruptcy will not remove any federal tax lien you have on your property. You need to repay the lien so it will be removed after being successful with the bankruptcy. As soon as you can, take a step on this; it will prevent any issue when you are trying to sell your property.

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