The close relationship between Taxes and Bankruptcy- How does it work?

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When it comes to Bankruptcy and Taxes, these two are often related to each other. When someone or a business is facing financial difficulties, they may consider filing for bankruptcy to obtain debt relief. However, before making any decisions on filing for bankruptcy, it is important to understand the relationship between taxes and bankruptcy.

Taxes and Chapter 7 bankruptcy

When a bankruptcy is filed, any outstanding tax debt that is owed would be required to be addressed. Depending on the type of bankruptcy being filed, taxes may be treated differently. For example, in a Chapter 7, certain tax debts may be dischargeable, meaning that they can be pardoned through the bankruptcy process. A good bankruptcy attorney will advise on the specific criteria that must be met in order for tax debts to be dischargeable under a Chapter 7. Normally, the tax debts must be income taxes that are over three years old. The tax returns need to be filed at least 2 years prior to the bankruptcy filing.

Taxes and Chapter 13 bankruptcy

On Chapter 13 cases, tax debts are normally considered non-dischargeable. This means that the filer is still responsible for paying off the tax debt even after the bankruptcy is completed. A Chapter 13 provides a 3 to 5 years structured repayment plan which can make it easier for the individual or business to pay off their tax debt over time.

Situations in which Tax Debt is not dischargeable

There are many different situations where a tax debt is not dischargeable even on a Chapter 7 case. For example, if the IRS has placed a tax lien on the individual or business prior to the bankruptcy filing, the debt may not qualify to be dischargeable. Some other examples of non-dischargeable taxes are taxes owed for fraud, willful evasion, or failure to file tax returns. Additionally, taxes owed for trusts fund recovery penalties, sales taxes and property taxes are also not dischargeable.

In summary, the relationship between taxes and bankruptcy can be complex, specially when it comes to determining the treatment of tax debts in bankruptcy, Our suggestion for any business or individuals thinking about filing for bankruptcy is to consult with an experienced bankruptcy attorney to go over the different options. If you have questions or would like more information contact us or visit our Website at At W M Law, We are Here to Help.

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Jeffrey L. Wagoner


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