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Eliminating Your Tax Debts Through Bankruptcy

Posted on in Bankruptcy
Eliminating Your Tax Debts Through Bankruptcy

You know that bankruptcy is a tool used to reduce overwhelming levels of debt. If you are struggling with significant debt, you have probably considered filing for bankruptcy as a way to reduce your debt. You might also know that only certain types of debt can be eliminated through bankruptcy. What are those types of debt? Which types of debt can be released, and which will stay with you after you work to repay your debts through either a repayment plan or a liquidation of your nonexempt assets?

Child support and spousal support, also known as alimony, debts cannot be eliminated. This is because the recipients of these kinds of support rely on them to cover their daily living costs. Student loan debt can also be difficult to discharge. Tax debt is another type of debt that, depending on the circumstances specific to the individual's debt, might or might not be able to be eliminated through bankruptcy.

Your Bankruptcy Chapter Matters

It can be much easier to have your tax debts eliminated if you file for Chapter 7 bankruptcy rather than Chapter 13. But not everybody can file for Chapter 7 bankruptcy – you need to pass the means test to determine if you are eligible to file.

If you can file for Chapter 7 and choose to do so, the types of tax debts that you can eliminate are limited. In fact, the debt itself must meet a set of very specific criteria to be eligible for discharge through Chapter 7 bankruptcy. These criteria are:

  • The debt must be at least three years old. If the tax was originally due fewer than three years prior to your filing for bankruptcy, it cannot be discharged;
  • The debt must be income tax debt. Other types of tax debt, like payroll tax, cannot be discharged through bankruptcy;
  • You must have filed a tax return for the debt. This means that you had to have filed a return for the money owed at least two years before filing for bankruptcy;
  • You must not have exceeded the “240 day rule.” This means that the debt must have either been assessed by the Internal Revenue Service (IRS) at least 240 days prior to your filing for bankruptcy or it must not have been assessed at all; and
  • You must not have committed tax evasion or fraud to avoid paying the debt.

It is important to remember that even if your tax debt is eliminated through Chapter 7 bankruptcy, if you have a tax lien in place on your property, this lien will not be eliminated.

Work With an Illinois Bankruptcy Attorney

Before you file your taxes this year, it is important that you know how a potential bankruptcy could affect them. Work with an experienced bankruptcy attorney to learn more about the intersection of bankruptcy and taxes. Our team at Newland & Newland, LLP is here to help you by providing you with quality legal representation and advice. Contact our firm today to schedule your initial legal consultation with us.

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