Tuesday, October 4, 2022

Can You Bankruptcy Tax Debt

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Buttax Liens Don’t Go Away

How Can Bankruptcy Settle IRS Tax Debt?

If the IRS has already placed a lien on your property, you’re out of luck. Even if you can discharge an income tax obligation, the discharge only wipes out your liability for the debtthe lien will not go away. So even though the IRS won’t be able to garnish your wages to collect the discharged tax debt, you’ll need to pay off the lien when you sell the property.

Can I Keep My Car If I File Bankruptcy

If you file for Chapter 7 bankruptcy and local bankruptcy laws allow you to exempt all of the equity you have in your car, you can keep the vehicleas long as youre current on your loan payments. And if the market value of a vehicle you own outright is less than the exemption amount, youre in the clear.

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.

Also Check: Do I Need W2 To File Taxes

Tax Debt In Chapter 7 Bankruptcy

With Chapter 7 bankruptcy, known as straight bankruptcy, things are more straightforward. If you meet the five criteria defined above, then the tax debt gets discharged. The discharge will also include penalties and interest generated by that debt.

If the tax debt doesnt meet those criteria, then it and any penalties generated from it will not be discharged. You can still file for bankruptcy and have your other debts discharged, but you will still owe those taxes and must repay them.

Managing Tax With Chapter 13 Bankruptcy

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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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How To Avoid Future Tax Debt Problems

To avoid debt problems in the future, it is important that you understand how you arrived at your current situation, in which you owe a great deal of money to Canada Revenue Agency.

Do you owe taxes because you cashed in the last of your RRSPs to pay your debts? This cant happen again soon, because any remaining RRSPs will be liquidated in your bankruptcy.

On the other hand, if you are self-employed, you can easily find yourself with a tax debt at the end of the year. It is important to prepare for such an eventuality and to make sure that you make payments throughout the year.

We recommend that at the beginning of each year, self-employed individuals estimate the amount of income taxes they will owe and then remit one twelfth of this amount to the tax authorities even if the tax authorities do not require such frequent payments. Then, at the end of the year, tax time will actually be enjoyable as you will have minimal or no accumulated income tax debt. You might even receive a refund!

Finally, make sure you have realistic expectations concerning your lifestyle and your expenses . When do we accumulate tax debt? When we dont feel we can afford to pay it. Proper budgeting and business management can eliminate the monthly deficit that often contributes to serious tax arrears.

How The Insolvency Act Overrides The Cra Collection Process

The Bankruptcy & Insolvency Act, like the Income Tax Act, is federal legislation. In most situations, a bankruptcy or consumer proposal stops the Canada Revenue Agency collection process and eliminates the debt. There are some limited exceptions to that general rule which would be reviewed with your licensed insolvency trustee.

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Tax Debt: Bankruptcy And The Automatic Stay

Most IRS collections start with a notice of past-due taxes. Then, every few months, the IRS sends another letter. Each is slightly more threatening than the last. Eventually, these letters become legal notices. They also sometimes involve filing a lien, seizing a bank account, or garnishing wages. The automatic stay acts as a pause button. It prevents creditors from contacting you to collect their debts. As soon as you file your voluntary petition, the automatic stay usually takes effect. When that happens, IRS agents can’t even send you a letter about your back taxes. They are forbidden from trying to collect the debt.

The automatic stay extends to property as well. Although most of your personal property is exempt â or protected â during Chapter 7, the IRS and other debt collectors can’t touch any of the more valuable assets you happen to own.

An automatic stay is a powerful tool for protecting individuals. No matter what stage IRS collection efforts are in, the automatic stay stops them cold. With few exceptions, the stay applies to all forms of communication between debtors and creditors. Creditors who violate the stay can face serious consequences. And, although the stay prevents creditors from contacting you, it does not prevent you from beginning conversations with them. This puts you in control of negotiations with your creditors during bankruptcy.

Requirements When Filing For Bankruptcy

Can You Discharge Your Tax Debts Through a Bankruptcy?

To successfully file bankruptcy you have to meet certain criteria. If you dont, you can say goodbye to any hope of your application being approved.

Different types of bankruptcy, or chapters, have specific qualifying requirements. These often depend on your income status. When you apply you need to supply bank statements or complete means-tested assessments.

However, there are some general rules which apply when it comes to filing bankruptcy:

  • You cannot discharge debt from any case of tax fraud or tax evasion, and the penalties that come with them.
  • You can only use bankruptcy to discharge tax debts that are at least three years old. For example, you wont be able to discharge tax debt from 2012 until 2015.
  • You cannot discharge tax debt on a return that you havent filed. So if you have penalties for failing to file a tax return, then you cant discharge these through bankruptcy.
  • Any tax debt you want to discharge must be from a tax return that you filed at least two years before your application for bankruptcy. For example, lets say you were meant to file your taxes in 2012 but didnt file them until 2016. In this case, you cant discharge tax debt from this return until 2018.
  • You cannot file bankruptcy until 240 days after your taxes are assessed. If your taxes were audited and reassessed then the clock restarts and you must wait a further 240 days.
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    Bankruptcy Vs Paying Off Debt

    If you have debt, chances are youve spent time, effort, and earnings trying to pay it off. You may feel like your only option is to file bankruptcy and try to start over. However, there are both positive and negative consequences for filing for bankruptcy vs. paying off debt, so its important to understand your own financial situation and goals to decide which path is right for you.

    Your Cra Debt Options

    If you are having CRA debt issues, speaking with a licensed insolvency trustee to help review your options is the first step. They can see what the best solution is for you, which may include a consumer proposal or a bankruptcy. When successfully entering into either a bankruptcy or a consumer proposal, this stops any further actions against you by the CRA.

    If you owe the CRA money, dealing with CRA tax debt should be your top priority. Not only can the agency use widespread collection actions, but it can also withhold GST and Child Tax credits or even remove money from your bank account leaving you out of luck when it comes to meeting other obligations like mortgage payments.

    Dont delay if you find yourself in tax debt. There is a solution to all types of debt.

    If you live in the GTA, book a free consultation with the caring professionals at David Sklar & Associates. We are here to help assist you in making the best decision for you.

    Read Also: Form 1040 State Tax Refund

    What If I Cannot Reach An Agreement With Cra

    A consumer proposal gives you a chance to repay a portion of your debts over a period of time, and if accepted, the CRA will not be able to prevent your tax debt being included in the proposal.

    A bankruptcy can also wipe out tax debts and give you a fresh financial start.

    If you owe tax debt and are unable to negotiate with the CRA we can help you deal with your CRA tax debt.

    When you declare bankruptcy you can include your tax obligations as debt in the bankruptcy.

    Income tax debt & CRA debt can be wiped out when going bankrupt as it is an unsecured debt.

    Penalties and interest charges can also be discharged by going bankrupt.

    If you decide to declare bankruptcy, your trustee will help you with your tax returns.

    If you file a consumer proposal you can also clear tax liens owed to the government.

    Need Help Reviewing Your Financial Situation? Contact a Licensed Trustee for a Free Debt Relief Evaluation

    Has The Taxpayer Refrained From Any Willful Attempt To Evade Or Defeat The Tax Debt At Issue

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    Likewise, willful attempts to evade or defeat a tax liability bars the discharge of the tax debt. 11 U.S.C. § 523.

    Practice tips:

    The devil is always in the details this is a broad overview of a complex area of law. If you need help working through whether a bankruptcy would alleviate a tax problem, or have questions regarding tax debt within a bankruptcy, contact the experienced bankruptcy attorneys at Essex Richards today.

    Heather Culp is an attorney with Essex Richards in Charlotte.

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    What Assets Are You Allowed To Keep In Bankruptcy

    Exemptions allow you to keep a certain amount of assets safe in bankruptcy, such as an inexpensive car, professional tools, clothing, and a retirement account. If you can exempt an asset, you dont have to worry about the bankruptcy trustee appointed to your case taking it and selling it for your creditors benefit.

    The Automatic Stay And The Irs

    The moment you file a consumer bankruptcy, a mechanism called the “automatic stay,” or auto-stay, stalls most legal proceedings and prohibits your creditors from continuing collection efforts. This means creditors can’t sue, garnish, bill, or call you, or otherwise attempt to collect a debt you owe. The auto-stay applies to the IRS as well. While the automatic stay is in place, the IRS cannot send you collection notices, garnish your wages or bank accounts, or even offset your tax refund.

    The automatic stay expires when your bankruptcy discharge is entered or your case is closed or dismissed, whichever happens first. If you owe tax debt to the IRS, it might hold your refund until the automatic stay expires, so that it can collect by taking back some of your refund. Also, while the IRS is not allowed to collect for itself while the automatic stay is in effect, it may offset your refund to pay back persons to whom you owe child support — because child support collections are not stopped by the automatic stay.

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    Should I File Bankruptcy For Tax Debts

    One common misconception about bankruptcy is that tax debts, whether owed to Canada Revenue Agency or provincially, do not go away after a bankruptcy. But this could not be further from the truth!

    Only a few types of debts survive a bankruptcy. All tax debts, whether for personal income tax or directors liability for a company like GST/HST/QST and deductions at source will be discharged in a bankruptcy, meaning they will go away once the bankruptcy is over.

    While the bankruptcy law is more restrictive with people who have over $200,000 in personal income tax debt that represents more than 75% of their total debts, this does not mean the debts will not go away. You can file bankruptcy in those circumstances, however you will not be eligible for an automatic discharge. If you think you may fall into this situation, speak with a licensed insolvency trustee to understand your options better.

    One type of debt that may not go into a bankruptcy is government overpayments, most often coming from Employment Insurance or Social Assistance. Sometimes, these debts will follow you after a bankruptcy based on how the government has determined the overpayment. The best way to know if a debt will follow you or not is to speak with a licensed insolvency trustee about your situation.

    Every situation is unique and for every person who comes to see me, I offer the following free analysis:

    Can Bankruptcy Stop Tax Liens

    Can Bankruptcy Discharge Tax Debt?

    Does bankruptcy remove tax liens? The answer is a partial yes. Legal and tax experts agree that bankruptcy cannot completely stop pre-existing tax liens by the IRS.

    While the automatic stay will stop new lien petitions, existing liens arent removed when you file for bankruptcy. For bankruptcy and IRS liens which existed prior to bankruptcy, the bankruptcy will be of little effect.

    Heres how it works. If you have a federal tax lien placed on any property because of back taxes that you owe, the discharge of that debt during bankruptcy wont remove the lien. The lien will have to be removed separately if you wish to sell your property with clear title.

    Therefore, bankruptcy for liens is not the best option. One recommendation is to get back on your feet financially, through bankruptcy, and then attack the liens with help from your lawyer.

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    What Happens If I Have Tax Debt That Cant Be Erased Yet

    Plenty of taxpayers are in this boat, and they all have several legal options. An attorney can advise you on the best course of action, but ultimately, the decision is yours.

    Pay in installments. Some people talk to the IRS about a payment plan. The IRS usually backs off once the taxpayer starts an installment agreement. After all, the IRS just wants the money. It doesn’t really want to garnish your wages. Keep in mind that installment agreements are only a good idea if you have the money. If thatâs not the case, you need another option.

    Participate in the Offer in Compromise program. The IRS has many programs to help taxpayers pay their tax debt when they have little or no money. The main example is the Offer in Compromise program where taxpayers pay what they can, and the IRS forgives the rest. This program can be extremely complex, and few people qualify. Also, if the taxpayer has any assets whatsoever the IRS will force the taxpayer to sell them. Finally, while the taxpayer negotiates, the IRSâs harassing collections techniques continue.

    You Cant Discharge A Federal Tax Lien

    If your taxes qualify for discharge in a Chapter 7 bankruptcy case, your victory may be bittersweet. Why? Bankruptcy wonât 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. Youâll have to pay off the tax lien before selling and transferring the propertyâs title to a new owner.

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    What Happens If I Just Dont File Taxes

    Individuals who owe federal taxes will incur interest and penalties if they dont file and pay on time. The penalty for not filing your taxes on time is 5% of your unpaid taxes for each month that the return is late, maxing out at 25%. For every month you fail to pay, the IRS will charge you 0.5%, up to 25%.

    How Your Creditors Are Paid

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    The official receiver will take control of your assets unless an insolvency practitioner is appointed. An insolvency practitioner is usually an accountant or solicitor.

    The person who takes control of your assets is known as the trustee. The law says you must cooperate fully with them.

    The trustee will sell your assets and tell the creditors how the money will be shared. Creditors must then make a formal claim. You cant make payments directly.

    If you have assets, money from the sale of these will be used to pay the costs of the bankruptcy process before creditors are paid. If your case is administered by the official receiver the following fees will all be deducted from the money realised:

    • an administration fee of £1,990 if you applied for your own bankruptcy or £2,775 if someone else applied
    • a general fee of £6,000
    • 15% of the total value of assets realised
    • a fee charged at an hourly rate where money is paid to creditors

    If there are insufficient assets in your case the official receiver will still process your bankruptcy.

    Next, money will be used for:

    • certain debts in relation to employees, if you had any
    • your other creditors
    • interest on all debts

    Any money left over will be returned to you. If everyone is paid in full you can apply to have your bankruptcy cancelled .

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