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Can Tax Debt Be Discharged During Bankruptcy?

When you’re in tax debt and find yourself unable to repay it, filing bankruptcy could be an option at your disposal. Depending on your situation, you may be able to partially or fully discharge your debt. You may have heard that tax debt cannot be discharged during bankruptcy, but this is only true in some circumstances. As long as your debt meets specific qualifications and you haven’t committed tax fraud or failure to file a tax return, you should be able to utilize bankruptcy as a method of either discharging or restructuring your tax debt.

Since bankruptcy has long-term financial and legal consequences, the US Bankruptcy Court highly recommends seeking a qualified attorney’s advice, even though it is possible to file for bankruptcy without one. If you find yourself in a situation where paying off your tax debt may be impossible, seeking the help of an experienced tax debt attorney can put you on the track to financial recovery. In many cases, it is financially advantageous to work out an agreement directly with the IRS before considering bankruptcy or applying tax debt to bankruptcy proceedings.

When you’re considering bankruptcy as an option to discharge or restructure your debts, you’re likely to benefit from seeking the help of a local Albuquerque bankruptcy attorney. New Mexico Financial & Family Law has the experience to protect you when filing for bankruptcy and can guide you through the steps you need to take when aiming to clear out your tax debt.

Call (505) 503-1637 or contact us online to schedule a free consultation at no risk to you.

Qualifications You Must Meet to Discharge Your Tax Debt

In order for your tax debt to qualify for the benefits that bankruptcy can provide, you must meet specific criteria:

  1. You have not committed tax fraud or evasion. Though the IRS usually has to provide convincing extensive evidence of fraud or evasion to prove a person is guilty, in a bankruptcy case where tax debt discharge is under consideration, they’re only responsible for providing a “preponderance of evidence” — enough to suggest there is a greater chance than not that you are guilty.
  2. You’ve got primarily income tax debt. It may not be possible to discharge other types of taxes, such as payroll taxes and sales tax, as well as most tax-related penalties.
  3. You filed a tax return for the taxes you wish to discharge three years before filing for bankruptcy. Income tax debt is dischargeable after three years, meaning newer debts aren’t eligible. You’re also required to file a tax return to have debt associated with those taxes discharged. If the IRS has to file a late return on your behalf, any unpaid taxes associated with that return cannot be discharged in bankruptcy.
  4. Your taxes must not have been recently assessed. If the IRS has assessed your income tax debt fewer than 240 days before filing for bankruptcy, any associated tax debts cannot be discharged.

What Kinds of Bankruptcy Can Include Tax Debt?

Though there are 6 Chapters of bankruptcy, the chapters that can have an effect on tax debts are Chapter 7, Chapter 11, and Chapter 13. When you’re looking to clear your tax debts, you should be aware of the different ways these types of bankruptcies handle debt.

Chapter 13

You can have your debts, including tax debt, partially discharged as long as you are reasonably able to repay a reduced amount of the debt back. The court will determine how much of the debt you are able to repay over a set period of time, and the rest will be discharged as long as you’re able to make timely payments. If you are fearful of losing valuable property like your home or vehicle to repossession, Chapter 13 may be a good option for you and you should discuss the details with a qualified bankruptcy attorney.

Chapter 11

Chapter 11 is a reorganization generally for incorporated businesses and individuals who have debt that exceeds the limits of Chapter 13. Usually, Chapter 11 is best when Chapter 7 and Chapter 13 are not legitimate options. It also allows for the discharge of tax debts when the reorganization plan is successfully completed.

Chapter 7

Things are a bit more concise with Chapter 7 bankruptcy, or what is sometimes known as “liquidation bankruptcy.” By surrendering your assets, you will be able to discharge any unsecured debts as well as most income tax debts and certain tax penalties. Just because this type of bankruptcy is more straightforward does not mean it doesn’t come with risks and consequences. It’s important to speak with a local bankruptcy attorney before making any decisions about filing Chapter 7.

IRS Collections During Bankruptcy Proceedings

Filing bankruptcy provides you with certain protections from the collection practices of creditors and the IRS. Normally, the government has a greater power than most other creditors to seize your property in order to pay back tax debt. When you successfully file bankruptcy, you should be able to put a stop to the collection efforts for a period of time. 

There are several cases where the government can continue to actively pursue collections, even after filing bankruptcy. One example is a tax lien. If the IRS had a tax lien on your property before you filed, you’d still be required to pay off the amount stipulated by the lien before you’re able to sell that property. A second example is if you continue failing to pay taxes after filing bankruptcy. The IRS can engage in collective action to recover new tax debts that you acquire during the bankruptcy process.

It’s important to keep making payments on any debts that are not covered specifically in your bankruptcy filing.

It should be noted that bankruptcy is not the only way to settle your debts. The IRS is often willing to come to a settlement with you outside of court to set up a repayment plan that you can afford. When looking for this kind of compromise, you’d be prudent to seek the help of a seasoned bankruptcy attorney, who should be able to negotiate on your behalf adequately.

Tax Debt Help From a New Mexico Bankruptcy Attorney

Chapter 7, Chapter 11, and Chapter 13 bankruptcies all offer options to help you partially or fully discharge your tax debt. If you’re considering filing bankruptcy to deal with tax debt that you can’t pay, having an experienced bankruptcy lawyer on your side can help you come out with the best chance of recovering in the long term. 

Consulting with an attorney can lead you to discover methods outside of bankruptcy to deal with your debt that you may not have considered. If bankruptcy looks like the best choice for you, having a seasoned team of legal advisors on your side will give you the peace of mind you need to focus on the future and boost your chances at financial security later on. Call us at (505) 503-1637 or contact us online to schedule a meeting with an Albuquerque bankruptcy attorney that can help you plan your next steps.

We are a debt relief agency and have practiced bankruptcy law for a combined 50 years. Our services include helping individuals and couples file for bankruptcy relief under the Bankruptcy Code. 

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