You Can’t Discharge A Federal Tax Lien
If your taxes qualify for discharge in a Chapter 7 bankruptcy case, your victory may be bittersweet. Why? Bankruptcy won’t wipe out prior recorded tax liens. Chapter 7 bankruptcy will wipe out your personal obligation to pay the qualifying tax and prevent the IRS from going after your bank account or wages. But if the IRS recorded a tax lien on your property before the bankruptcy filing, the lien will remain on the property. You’ll have to pay off the tax lien before selling and transferring the property’s title to a new owner.
There Was No Willful Evasion Or Fraud
In order for the income taxes to be dischargeable you cannot be guilty of intentionally trying to evade the liability. For those who file jointly, the authority assessing the liability will need to prove that both you and your spouse committed fraud related to a return or that you both tried to evade the taxes for you to be denied a discharge of the debt.
What Happens After I File For Bankruptcy
What if a creditor continues to contact me after I file bankruptcy?
Once the bankruptcy is filed, the automatic stay goes into place and creditors must stop contacting you as soon as they are notified of your case number. If the creditor calls you after notice has been provided, simply give them the information once again and make a note of the date, time and persons name that called on behalf of the creditor. If the creditor continues to contact you, either in writing or by phone, you should contact your attorneys office.
Where should I mail my monthly Chapter 13 payment?
The address will vary depending on the Chapter 13 bankruptcy Trustee over your case.
Charlotte Office Clients
For Chapter 13 bankruptcy Trustees in the U.S. Bankruptcy Court for the Western District of North Carolina, you can verify the address for your payments by checking the Trustees website. The payments should be sent to the Lockbox Address for Debtors Payments.
- Anita Jo Troxler, Chapter 13 Bankruptcy Trustee
What happens when I make my monthly payment to the Chapter 13 bankruptcy Trustee?
Each month the Trustee receives a payment from you, he will distribute payments to your creditors based on a priority as established by the Chapter 13 plan. If you do not make a payment to the Trustee, he will not distribute payments to your creditors.
Can my Chapter 13 bankruptcy payments change when I go to the meeting of creditors?
If my wages are being garnished by the IRS or state, when will it stop?
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Wiping Out State Tax In Bankruptcy
State taxes follow the same rules for dischargeability as federal income taxes. For instance, whether you can get rid of them will depend on when:
- the taxes came due
- you filed your return, and
- the taxing agency assessed the tax.
If the state income tax that you owe meets the rules for federal income tax discharge, then the state income tax can be discharged too. Learn more in Does Bankruptcy Wipe Out Tax Debt?
Business taxes are known as trust fund taxes and won’t get wiped out in bankruptcy.
How An Automatic Stay Affects Tax Debt
When you file for bankruptcy, you receive an automatic stay that protects you from most of the creditors you owe. They are barred from contacting you and taking other punitive actions while your bankruptcy is sorted out.
The IRS and Californias Franchise Tax Board are also subject to this automatic stay. To get full protection, youll list them among your creditors on your petition. This prompts the bankruptcy court to notify them of your filing.
With an automatic stay, the IRS and FTB are prevented from taking many of the collection actions they usually employ. This includes sending you collection letters and late payment notices. The IRS is blocked from garnishing your wages and levying your bank accounts. They are also restricted from taking a current tax refund from you.
The IRS and Franchise Tax Board must keep their hands off your property for the time being. However, if youre filing for bankruptcy just before the IRS is scheduled to sell off some of your property, youll want to personally notify them immediately of your automatic stay to prevent the loss of your assets.
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How A Chapter 13 Bankruptcy Can Help
If your state tax obligation wont go away, Chapter 13 bankruptcy will let you spread the payments over three to five years. Youll have the added benefit of potentially paying less on other debt, such as credit card balances, leaving you a larger percentage of your income to pay off the tax.
Understand, however, that tax debt can be complicated. Before you explore this route, youll want to get an assessment with a bankruptcy attorney. Getting legal help isn’t as expensive as you’d think, and most people believe hiring a bankruptcy lawyer is well worth the cost.
Hurdle #: Your Tax Return Has Been Filed For More Than 2 Years
You may be beginning to notice a pattern here, and no, youre not imagining it. The taxing authorities, both IRS and the State of California, dont want to be blind-sided by your filing. They want to make sure they have ample time to get their collection process revved up before you have the right to discharge tax debt in bankruptcy. If they let you file late returns all at once and then turn around and file a Chapter 7 case the same day, they wouldnt have time to evaluate your assets, your income, and the veracity of what youve claimed.
Mandating that your returns have to be filed for at least two years gives the tax man a good long time to make sure youve crossed all your ts and dotted your is. If your tax returns have been filed for two years or more, youve cleared hurdle #2 on the path to shedding tax debt in bankruptcy.
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What Makes A Chapter 12 Bankruptcy Different Than A Chapter 7 Or Chapter 13
In a Chapter 12 bankruptcy, usually, the debtor is a family farmer or fisherman. To qualify as a family fisherman, at least half of their income from the previous year must be from fishing. To qualify as a farmer, at least half of a taxpayers income for the last three years must come from farming activities. In a chapter 12 bankruptcy, taxes are priority liabilities, and the taxpayer must pay them first.
Which Tax Debts Get Discharged
Debtors can discharge some tax debt in bankruptcy, but not all. Taxes must meet the following criteria before being forgiven:
- The taxes are on wage-related income or gross receipts .
- The income taxes were due at least three years before you filed the bankruptcy.
- You filed your tax return at least two years before you filed the bankruptcy case. If you did not file a return, if you filed the return late, or if the IRS filed a substitute return for you, some bankruptcy courts have held that those taxes will never qualify for a discharge.
- IRS tax assessmentthe process of entering the tax on the books as a tax liabilityoccurred at least 240 days before filing for bankruptcy. This period could be lengthened if you had pending an offer in compromise or if you filed a prior bankruptcy case.
- You didn’t commit fraud or willfully try to evade paying your taxes for the tax year in question.
If you meet all of these factors, the chances are that your tax debt will be dischargeable. If not, your tax obligation won’t go away in a bankruptcy case.
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When You Can Discharge Tax Debt
If you need to discharge tax debts, Chapter 7 bankruptcy will be the better optionbut only if the tax debt qualifies for discharge and you’re eligible for Chapter 7 bankruptcy. All of these conditions must be met before you can discharge federal income taxes in Chapter 7 bankruptcy:
- The taxes are income taxes. Taxes other than income, such as payroll taxes or fraud penalties, can never be eliminated in bankruptcy.
- You did not commit fraud or willful evasion. If you filed a fraudulent tax return or otherwise willfully attempted to evade paying taxes, such as using a false Social Security number on your tax return, bankruptcy can’t help.
- The debt is at least three years old. The tax return must have been originally due at least three years before filing for bankruptcy.
- You filed a tax return. You must have filed a tax return for the debt you wish to discharge at least two years before filing for bankruptcy. , you have not filed a “return” and cannot discharge the tax. In some courts, you can discharge tax debt that is the subject of a late return as long as you meet the other criteria.)
- You pass the “240-day rule.” The IRS must have assessed the income tax debt at least 240 days before you file your bankruptcy petition, or not at all.
Managing Tax With Chapter 13 Bankruptcy
Filing your tax return might not be as burdensome once you realize that using Chapter 13 bankruptcy to manage your tax debt can be a smart move. Here’s why:
- Dischargeable taxes might be forgiven without any payment at all, depending on the amount of disposable income you have after your reasonable and necessary expenses are deducted from your pay.
- Dischargeable taxes won’t incur additional interest or penalties .
- You can satisfy an IRS tax lien through the Chapter 13 plan.
- The IRS is obligated to abide by the plan as long as you include all your outstanding income tax and keep your tax returns and post-petition tax obligations current during your Chapter 13 plan.
Bear in mind that any nondischargeable tax that won’t go away in bankruptcy must be paid in full during the three- to five-year Chapter 13 plan. When it’s over, you’ll be caught up on taxes and most or all of your other debts.
Unlike Chapter 7, in Chapter 13, you can discharge a credit card balance incurred due to paying off a nondischargeable tax debt. Learn more about tax debts in Chapter 13.
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What Are Some Differences Between Chapter 13 And Chapter 7 Bankruptcy
Chapter 7 requires you to sell all your non-essential assets and use the money to repay your creditors. Every state has different rules on which assets you have to sell. Once that happens, the debtor usually receives a discharge. That includes taxes that meets the criteria listed above. For a taxpayer to qualify for a Chapter 7 bankruptcy, your income must be under the state median.
With Chapter 13, you dont have to sell your assets, but you have to make repayments for three to five years. You end up paying all of your priority taxes and the majority of your non-priority taxes owed.
What Are Some Other Solutions For Tax Debt
If unpaid tax debt has you considering bankruptcy, you may want to explore other solutions first especially in light of the complex rules for bankruptcy and taxes.
These alternatives could include entering into an installment agreement with the IRS, making a deal with the IRS to delay collection efforts, or entering into an offer in compromise. An offer in compromise is an agreement between you and the IRS that allows you to pay a reduced amount.
There are pros and cons to each of these approaches. For example, youll need to pay a user fee for an installment agreement and will owe fees, interest and possible penalties. And the IRS wont always accept an offer in compromise.
Still, because these solutions address only your tax debt and dont affect other areas of your finances as much as bankruptcy does, they could be worth considering.
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Tax Debt Discharge In Chapter : A Timeline
All these rules apply to the bankruptcy process as well. If you have past-due tax debt, things will be a little different.
Filing: On your paperwork, you will list the tax debt as priority unsecured debt in Part 1 of Schedule E/F.
Trustee meeting: At this meeting, the trustee will review your paperwork, confirm your identity, and ask questions about any red flags in the paperwork.
In special circumstances, you’ll have to meet additional qualifications to discharge some types of debt. This may be true in cases involving tax liens. It’s also true in student loan cases. If you want to discharge student loan debt, you must convince the court that there is an undue hardship preventing you from repaying the loan.
Capital Loss Carryover Worksheetlines 6 And 14
Partnerships and Corporations
A separate taxable estate isn’t created when a partnership or corporation files a bankruptcy petition and their tax return filing requirements don’t change. The debtor-in-possession, or court-appointed trustee, must file the entity’s income tax returns on Form 1065, Form 1120, or Form 1120-S.
In cases where a trustee isn’t appointed, the debtor-in-possession continues business operations and remains in possession of the business’ property during the bankruptcy proceeding. The debtor-in-possession, rather than the general partner of a partnership or corporate officer of a corporation, assumes the fiduciary responsibility to file the business’ tax returns.
The filing requirements for a partnership in a bankruptcy proceeding don’t change. However, the responsibility to file the required returns becomes that of the trustee, or debtor-in-possession.
A partnership’s debt that is canceled as a result of the bankruptcy proceeding isn’t included in the partnership’s income. However, It may or may not be included in the individual partners income. See Partnerships, later, under Debt Cancellation.
Internal Revenue Code section 355 generally provides that no gain or loss is recognized by a shareholder if a corporation distributes solely stock or securities of another corporation that the distributing corporation controls immediately before the distribution.
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Tax Return Filing Requirements
Although youve filed for bankruptcy, you still have to file your tax returns.
- Personal: You are still required to file personal income tax returns after filing for bankruptcy. Your bankruptcy representative may also be required to file estate fiduciary tax returns.
- Business: The business is still required to file tax returns after filing for bankruptcy. If the court appoints a trustee, the trustee will file the required tax returns.
Can You Eliminate Taxes In Bankruptcy
Or, as many often ask: Can you include taxes in a bankruptcy filing?
The answer in many cases is : YES! Certain tax debts are dischargeable or may be managed in bankruptcy.
The primary relevant factors to determine dischargeability are
- the age of the taxes ,
- the date of assessment of the taxes ,
- the dates you filed your required returns
- and whether you willfully attempted to evade payment of the tax by fraud.
Whether you can discharge these taxes in a bankruptcy case depends on a combination of the above factors as well as under what chapter of bankruptcy you file.
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New York State Tax Lien
- Non-dischargeable tax debt is collectible for 20 years, with the 20 year period being renewed whenever a payment is made.
- Tax lien is created by filing of NYS Tax Warrant, which attaches for 10 years to all personal property in any location, and to all real estate located in the County where it is filed.
- New York State exemptions limit the State Tax Departments ability to collect, protecting many assets from seizure, including: the 10% limit on salary garnishments the $50,000.00 homestead exemption for residences the protections afforded qualified pension plans, profit sharing plans, IRAs and most retirement plans.
Discharging State Income Taxes In Bankruptcy
Discharging State Income Taxes in Bankruptcy. FTB California State income tax can be burdensome and may contribute to a debtors decision to file for bankruptcy. Fortunately, state income tax is dischargeable in bankruptcy taxes under certain circumstances. Those circumstances are largely identical to the circumstances under which federal income taxes can be discharged, as the power of the bankruptcy courts are not affected by whether the taxes are state or federal.
First, the bankruptcymust be filed three years from the date the return was due . To give an example, the due date of the 2017 Form 540 was October 15, 2018. A 2017 California income tax liability cannot be discharged in bankruptcy until October 15, 2021.
Second, debtors seeking to discharge state income tax must have filed a tax return for the income tax on which they seek to have discharged. That tax return does not have to have been filed on time a late tax return filing will suffice, as long as the return was filed more than two years before the bankruptcy commences. However, under the current bankruptcy laws, state and federal taxes cannot be discharged in bankruptcy if the IRS or state files a return on your behalf.
Please contact usfor more information about bankruptcy anddebt settlement. RJS LAW is an honest, ethical and trustworthy law firm that can guide you through the process referring you to trusting professionals. Phone: 595-1655
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