Will Chapter 7 bankruptcy help you eliminate your income tax debts, or will you still owe the Internal Revenue Service and the state of Utah?
Bankruptcy laws prevent the courts from wiping out most debts for federal and state taxes. However, if your tax debts meet certain qualifications, Chapter 7 may end your legal obligation to pay Uncle Sam.
Some Tax Debts Qualify for Chapter 7 Bankruptcy Discharge
As you can imagine, the IRS imposes strict rules regarding which types of taxes can be discharged through Chapter 7.
First of all, the money you owe must be from federal or state income taxes. And to have your debt erased, your tax returns must show no signs of fraudulent tax activities or evasion.
Time is also a crucial factor. Taxes owed on your 2016 return won’t be eligible for discharge, because your tax liability must be at least three years old. Plus, your debt can only be cast aside if you filed the tax return at least two years before filing for bankruptcy. In addition, your taxes must have been assessed by the IRS at least 240 days prior to your Chapter 7 bankruptcy filing.
If any of those conditions have not been met, even by a day or two, you’ll continue to owe the debt at the conclusion of your bankruptcy case.
Non-Dischargeable Tax Debts in Chapter 7 Bankruptcy
Prior recorded tax liens will not qualify. In other words, if the government has already recorded a tax lien against your real property for those debts, that lien will survive the bankruptcy. Before you can sell your property, you’ll have to pay off the lien.
Most property taxes are also typically not dischargeable. Any assessed balance that was due more than one year before your bankruptcy filing might be eligible, but again, tax liens will not go away.
Other debts that are non-dischargeable through bankruptcy include taxes from unfiled income tax returns and those taxes that your employer is required to withhold from your paycheck.
Options to Pay Tax Debts That Remain After Chapter 7 Bankruptcy
After receiving your bankruptcy discharge, you may still owe money for various types of taxes. Resolving these debts in a timely manner will help you get back on a sound financial track.
Fortunately, the government has programs that can help settle your old debts. You may be able to enter into a payment agreement, for example. Or you can try negotiating a reduced settlement amount with the IRS.
The experienced attorneys of Lewis Adams & Associates can answer all of your questions about tax debts and bankruptcy in Utah. Contact our Salt Lake City office today to schedule your free Chapter 7 bankruptcy consultation.