Resolving Tax Obligations Through Bankruptcy

At James H. Wilson, we understand that dealing with tax debts can be overwhelming. While you might come across advertisements claiming the possibility of eliminating tax debts through bankruptcy, the truth is not as straightforward. Although many tax debts are in fact ineligible for discharge through bankruptcy, there are certain circumstances where it may be possible. Navigating whether your tax debts can be addressed in a Chapter 7 liquidation proceeding, or whether they must be repaid through a Chapter 13 repayment plan, requires careful consideration and legal knowledge.

For individuals considering Chapter 7 bankruptcy as a means to manage their tax debts, eligibility is the first hurdle. Only specific tax obligations may be discharged, and James H. Wilson is here to help determine if your situation meets the necessary criteria.

Qualifying for Tax Debt Discharge

Your eligibility to discharge federal income tax debts under Chapter 7 is contingent upon several strictly enforced criteria:

  • The tax debt must pertain to income taxes. Other types of taxes, such as payroll taxes or penalties for tax fraud, are not dischargeable in bankruptcy.
  • There must be no instances of willful evasion or fraud on your part. Any fraudulent actions, like using a false Social Security number or submitting a deceitful tax return, will exclude you from obtaining relief through bankruptcy.
  • The tax debt must be at least three years old. Specifically, the tax return related to the debt should have been due for filing at least three years prior to your bankruptcy petition.
  • A tax return for the debt must have been filed. It’s essential that you submitted a tax return for the relevant tax debt no less than two years before your bankruptcy filing.
  • You need to meet the “240-day rule”: The IRS must have assessed the income tax debt at least 240 days before you file your bankruptcy petition, or it should not have been assessed at all. Be aware that this period may be extended under certain conditions, such as if the IRS has temporarily halted collection activities due to an offer in compromise or a prior bankruptcy filing.

Dealing with Federal Tax Liens Post-Bankruptcy

Even if you successfully discharge your tax debts in a Chapter 7 bankruptcy, the satisfaction may be less than total if there are federal tax liens involved. These liens, if recorded before your bankruptcy filing, survive the process. While bankruptcy can eliminate your personal liability for the tax debt and protect you against collection actions like wage garnishment or bank levies, any existing liens on your property remain.

To ultimately resolve these liens and clear the path for property transactions, you’ll likely need to satisfy the outstanding amounts. At James H. Wilson, we work with our clients to address these complex issues and seek the most favorable outcomes.

Should you require advice on managing tax debts through bankruptcy, or have questions about any other financial obligations, James H. Wilson encourages you to reach out for a consultation. Contact us at 804.740.6464 to secure the guidance and support you need to navigate through your bankruptcy concerns effectively.

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