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Is My Tax Debt Eligible to Be Discharged in Chapter 7 Bankruptcy?

Posted on in Chapter 7 Bankruptcy

Lake County bankruptcy lawyerAre you substantially behind on your bills and so far in debt that you are considering bankruptcy? Is a large portion of your debt money that you owe to the IRS in back taxes? If you answered “yes” to both of these questions, you probably have a question of your own: Will bankruptcy help with my tax debt anyway?

Under the United States Bankruptcy code, not all debts can be discharged by filing for bankruptcy. Some debts, such as student loan obligations, will remain your responsibility even if your bankruptcy is successful in wiping out most of your other debt. Tax debt, in most cases, can be discharged, but very specific criteria apply.

Discharging Tax Debt in Chapter 7

For the purposes of this discussion, we will focus on Chapter 7 bankruptcy, sometimes called “straight bankruptcy.” Under Chapter 7, you, as the filer, agree to turn over your assets (with certain exceptions) to the bankruptcy trustee. The trustee will liquidate your assets and use the proceeds to pay off your debts. Remaining debts are discharged, presuming that they are eligible for discharge.

In a Chapter 7 case, tax debts are generally eligible for discharge if the taxes owed are income taxes. This means your obligation is based on your wages, commissions, other income, or gross receipts. Other types of owed taxes are not eligible to be discharged. Your tax debts may also be deemed ineligible if you are found to have misrepresented information on your tax return.

The other important factor is that only tax debt that has been officially reported to the IRS can be discharged. This means you must have filed a tax return, even if you did not pay anything toward your tax obligation. Presumed tax debts for years of which you did not file a return cannot be discharged.

Important Timeframes

Tax debt may become eligible for discharge three years after they were due. For example, if you owe taxes for 2019, your federal return was due on July 15, 2020—the normal filing deadline was extended because of the coronavirus health crisis. The earliest this tax obligation could become eligible for discharge in Chapter 7 bankruptcy is July 15, 2023.

Your return must have been filed at least two years prior to your filing for bankruptcy. Continuing with the 2019 tax debt example, you cannot wait until 2023 to file your 2019 return and then immediately file for bankruptcy.

Waiting for the Outcome

The IRS cannot continue collection efforts on your tax debt while your bankruptcy is proceeding. Your filing will cause an automatic stay to be put in place which prohibits debt collection efforts during the bankruptcy proceedings. If your tax debt is found to be ineligible for discharge, however, the stay will be lifted, and the IRS can and almost certainly will continue its collection efforts. If the debt is eligible for discharge, however, you will be relieved of your obligation to pay it once the bankruptcy proceedings are complete.

A Lake County Bankruptcy Attorney Can Help

To learn more about discharging tax debt in Chapter 7 bankruptcy, contact an experienced Libertyville Chapter 7 bankruptcy lawyer. Call Newland & Newland, L.L.P. at 847-549-0000 to schedule your free, no-obligation consultation with a member of our team today.





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