Facts About Taxes And Bankruptcy
Bankruptcy and taxes are often a mystery to people. On the one hand, bankruptcy discharges debts. On the other hand, the government needs taxes to run the country. When it comes to government and taxes, here are some things that many people don’t know:
- Some income tax can be discharged – Generally, income tax is not dischargeable in bankruptcy. But if the taxes were due more than three years before you file for bankruptcy, they could be dischargeable. You must have filed a tax return to discharge any type of income tax.
- Some taxes are dischargeable – Don’t assume that if it’s from the government it can’t be discharged. There are a lot of different kinds of taxes. Just because most income taxes can’t be discharged doesn’t mean that other kinds of taxes can’t be discharged.
- Even if not dischargeable, bankruptcy can help with tax debt – Like everyone else, the government has to abide by the automatic stay that goes into place the minute you file for bankruptcy. That means that any garnishments, bank account freezes, or other collection actions will stop as soon as you file for bankruptcy. You can then use that time to organize your finances.
You also can pay your back taxes through the course of a Chapter 13 plan. Those payments may be less than what you’re paying now, if you are making payments, or less than what the IRS is demanding that you pay.
Additionally, after bankruptcy, you may be able to use the extra money you have from not having to pay your other debts, to apply to your tax burdens.
- No new penalties accrue in a Chapter 13 – One good thing about paying off back taxes in a Chapter 13 is that the government cannot access any new penalties (such as late fees) while you’re paying off the taxes in your Chapter 13 plan.
- Some penalties are dischargeable – Even if your taxes aren’t dischargeable, the penalties that have been assessed on those taxes may be. Most penalties can be discharged in a Chapter 13 bankruptcy. Additionally, any penalty that has been assessed on a dischargeable tax is also completely dischargeable.
- Bankruptcy can help with certain tax liens – While federal tax liens will survive the bankruptcy, your personal obligation to pay them often does not. Additionally, In a Chapter 13 bankruptcy case, the lien only needs to be paid to the value of whatever property is subject to the lien. This can save you a lot of money. The government also cannot lien any of your property that is acquired after the filing of the bankruptcy case.
- You won’t be taxed on discharged debt – Unlike when you have debt excused outside of bankruptcy, which can be taxed, debt that is discharged in bankruptcy is not taxable.