Tax Debt Relief via Bankruptcy Protection
If you have ever discussed the topic of bankruptcy, one statement you have probably heard on multiple occasions is that it is impossible to discharge taxes. However, this statement is not accurate. It is possible to discharge certain income tax debt or at the very least reduce the debt through the implementation of an appropriate payment plan.
How can Bankruptcy Protect me From Back Tax Debts?
Although not all taxes can be discharged, if you are facing bankruptcy you owe it to yourself to seek the advice of a qualified attorney who can explain which taxes can be eliminated or reduced through the bankruptcy process. To qualify to file bankruptcy, certain income and asset limits must be met. A bankruptcy lawyer can tell you whether or not you qualify to file and give you advice about which type of bankruptcy is most appropriate for your individual circumstances. Qualifying for Chapter 13 bankruptcy is somewhat easier than qualifying for Chapter 7; however, both types allow taxes to be discharged provided specific conditions are met.
Personal bankruptcy, also referred to as Chapter 7 bankruptcy, is sometimes an individual's only way of handling overwhelming debt that he or she has no realistic means of repaying. Most bankruptcies are filed voluntarily by those who have exhausted all other possible ways of repaying their creditors. Bankruptcies are processed through the courts, the latter of which typically have dedicated judges who deal with such matters on a regular basis.
Chapter 13 bankruptcy is another option your attorney may recommend. With this type of bankruptcy you have the opportunity to make a payment arrangement with which to pay off priority tax debts and other obligations over a period of three to five years. Provided you continuously make your bankruptcy payments and have an active case, an automatic stay will prevent the Internal Revenue Service from pursuing collection activity to obtain repayment. An additional advantage of this option is that further penalties will not be incurred and most existing penalties are not regarded as part of the priority tax debt.
When You Can Discharge a Tax Debt
It is important to understand that there are only certain situations in which tax debts can be discharged. For example, before qualifying for reduction or elimination of taxes it must be determined that you are eligible to file bankruptcy. Additionally, federal income tax debt can only be discharged if you meet certain conditions:
Taxes owed must be on your income, such as payroll taxes for which you filed a legitimate tax return. However, if you filed a fraudulent tax return or committed willful evasion, pursuing bankruptcy to clear the tax debt is not an option.
You must also be in compliance with the 240-day rule: the income tax debt must have been assessed by the Internal Revenue Service a minimum of 240 days prior to you filing your petition for bankruptcy. Finally, the debt must have been from a tax return that is at least 24 months old.
Will Bankruptcy Protect From all Tax Debts?
It is important to understand that bankruptcy will not protect you from all tax debt. For example, a federal lien cannot be absorbed by bankruptcy and property taxes do not qualify for discharge during bankruptcy proceedings. It may also help you to know that negotiating with the IRS concerning liens or back taxes is sometimes an option if they cannot be discharged, but you should not attempt to negotiate without the assistance of an attorney.
What are the Negative Aspects of Filing for Bankruptcy?
Declaring bankruptcy can be an advantageous process for those who are hopelessly buried in debt. However, there are also negative aspects associated with this course of action. For instance, going bankrupt is an incident that will remain on your credit report for seven to 10 years. Although this will not automatically prohibit you from acquiring credit or loans, applying for credit before the bankruptcy is discharged will be more difficult.
Why Work with an Attorney to use Bankruptcy for Tax Relief
The process of going bankrupt was invented to offset the deadlock between you and your creditors, not to eliminate your entire responsibility for your financial obligations. The procedure is designed to allow you to maintain your household while at the same time offering some compensation to your creditors. After such a petition is filed, collection activity by creditors or lending institutions to which you owe money must cease. However, bankruptcy can be an unwieldy process and one that is associated with substantial paperwork and attention to detail. You must provide documentation to the courts in order to prove your income, debt and assets. This gathering of paperwork and documented proof of your financial status can be a daunting endeavor. However, a licensed attorney can assist you with the process and significantly reduce your levels of stress and anxiety throughout the proceedings.
Although legal representation is not a requirement in order to file bankruptcy, it is never wise to proceed without the advice of such a professional. This is especially true if you are hoping to discharge certain tax debts, as the regulations concerning such matters can be particularly confusing to consumers who have little or no knowledge of tax laws. If you make mistakes at a bankruptcy hearing or overlook important aspects, it may ultimately hurt your case.
Why Work With Our Law Firm?
Most big tax law firms charge clients to do nothing more than file forms and shuffle paperwork. However, with Pearson Butler an actual attorney will represent you throughout the process. The attorney will meet with you personally and review your specific tax debt needs, after which a plan will be created featuring one of the many tax settlement programs available through the Internal Revenue Service.
Our qualified attorneys can quickly stop collections efforts while you are within the negotiations process and advise you about how to realistically reduce your tax debt without exaggerating the outcome. Only you can decide if bankruptcy is the most appropriate course of action through which to clear or reduce tax debt, and speaking to one of our legal professional is the best way to make this determination.