The Internal Revenue Service (“IRS”) is the largest creditor in the country. When owed income tax debt, the IRS can be especially aggressive in its collection efforts and have a variety of ways of collecting. Although the IRS offers debt settlements and repayment plans, many of these options are economically unfeasible, forcing many to turn to bankruptcy for relief. If you have federal income tax debt, filing for Chapter 7 or Chapter 13 bankruptcy can help you get back on your feet.
Tax debt in a Chapter 7
Generally, if the IRS hasn’t filed a lien against your assets, income tax debt is “unsecured” debt, meaning it is not tied to any of your property like credit cards or medical bills. However, despite its unsecured status, the bankruptcy code treats income tax debt as “priority” debt. To discharge or eliminate income tax debt in Chapter 7, there are several factors that must be met.
First, the IRS must have assessed your income tax debt at least 240 days before you file your bankruptcy petition. The date of assessment can normally be found on your tax transcripts. However, a general rule is that if you have not received a letter including the entire amount due from the IRS, it likely has not been assessed yet.
Second, you must have filed your income tax return for the tax debt in question at least two calendar years prior to the bankruptcy filing. This does not include “substitute” returns, such as when the IRS files a return on your behalf.
Lastly, the tax debt must be income tax related and not a result of willful nonpayment or fraud.
If your tax debt fits within these rules, it can be discharged or eliminated by filing for Chapter 7 bankruptcy.
Tax debt in a Chapter 13
Unlike in a Chapter 7 bankruptcy, in Chapter 13 bankruptcy you repay your creditors back pursuant to your plan of reorganization or Chapter 13 plan. If the tax debt fits within the guidelines above, you may be able to pay your tax debt back in a Chapter 13 plan at a fraction of the amount owed.
Even if the tax debt is not dischargeable, however, you can repay the priority tax debt, and even secured tax debt, inside your case. This will help you repay your debt without having fear of the IRS harassing your for repayment.
Even though the Bankruptcy Code treats income tax debt as “priority,” the automatic stay still applies to the IRS. T that filing for bankruptcy will halt the IRS’ collection efforts, including garnishing your wages, or file a property lien against your assets.
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Above is a general overview of how income tax debt can be eliminated or paid in a bankruptcy case. If you owe the IRS and are out of options, contact DebtPros today at (312) 883-5422 for a free consultation. Unlike many bankruptcy firms, when you call us, you will speak directly with a bankruptcy lawyer who will advise you on all your options.
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