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Bankruptcy and Taxes

Bankruptcy Helps with Tax DebtYou May Be Able to Reduce or Eliminate Tax Debt in Bankruptcy

Did you know that in many cases all or a portion of old tax debt can be discharged in bankruptcy? And even if your tax debts are too new and cannot be discharged, filing a Chapter 13 bankruptcy in San Jose can provide a powerful way to pay off income tax debts over time. The rules governing how tax debts are treated in each chapter of bankruptcy are complex, and you should contact our San Jose Bankruptcy attorneys for a free consultation regarding what relief bankruptcy may offer you for your old income tax debt.

Tax Debts in Chapter 13 Bankruptcy

In Chapter 13 bankruptcy, income tax debts are categorized into “non-priority” and “priority” debts. Generally non-priority tax debts do not have to be paid back in their entirety through the Chapter 13 plan—meaning that some or all of these debts may be discharged upon the debtor’s completion of her Chapter 13 plan. In general, if the tax debt is old enough, and the debtor filed her income tax returns timely, and so long as the IRS has not placed a lien against the debtor’s assets, then the taxes may be treated as non-priority, unsecured claims, and the taxes are treated just like credit card debts, medical bills, and other general unsecured claims. In such a case, the debtor can discharge some or all of these tax debts.

Chapter 13 can offer real relief for priority tax debs as well, however, because even though priority tax debts must be paid off through the Chapter 13 plan, the Automatic Stay of the bankruptcy case will protect the debtor from the IRS or Franchise Tax Board by preventing these tax authorities from garnishing the debtor’s wages, levying her bank accounts, or placing new liens against her assets. The debtor can then propose a workable payment of such priority tax debts through her Chapter 13 bankruptcy plan and take up to five years to do so.

Tax Debts in Chapter 7 Bankruptcy

In Chapter 7 bankruptcy, old income tax debts that would be treated as “non-priority” in Chapter 13 can in many instances be discharged completely! That means they can be wiped out, and you never have to pay them. Remarkably, as long as the income tax debts meet all of the rules relating to dischargeability, it is easier to discharge tax debts than it is to discharge student loans in bankruptcy!

As a general rule, if the taxes were first due more than three years before filing your bankruptcy petition, and provided that you filed your tax return for that year more than two years before filing your bankruptcy petition, and as long as the IRS has not assessed additional taxes for that tax year within the 8 months before you file your bankruptcy petition, then those taxes may be discharged in a Chapter 7 bankruptcy.

Again, the rules and time calculations for determining how tax debts are treated in bankruptcy are complex. Do yourself a favor and contact us for a free consultation with a San Jose Bankruptcy lawyer. We’ve dealt with hundreds of bankruptcy cases involving tax debts.


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Michelle D., San Jose

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