Owing a large sum of money or debt puts an incredible amount of stress on any individual. Whether you owe student loans, credit card debt, medical expenses or unpaid federal taxes it’s not easy seeing all your hard-earned money being spent on bills and debt as you struggle to make ends meet. There are many Americans who struggle with crippling debt and who resort to filing for bankruptcy in an effort to gain some relief and to be able to start over. Contrary to common misconceptions, filing for bankruptcy doesn’t mean that you lose everything and that you’ll never be approved for a loan or a credit card ever again. There are different types of bankruptcy options and you have to qualify by meeting specific requirements before you can go through with the proceedings. Depending on the type of bankruptcy you file – the most common for individuals being chapter 7 or chapter 13.
Chapter 7 bankruptcy allows you to eliminate the majority of your debt by liquidating your assets as you work with an appointed trustee who will sell off your belongings and distribute the proceeds to whoever you owe money to. Chapter 13 bankruptcy doesn’t eliminate your debt, but instead you work to reorganize your debt based on your income and set up a repayment schedule with your debtors. The requirements for each of these options is different and when you work with an attorney experienced in bankruptcy filings, they will advise you on which option is best suited for your unique situation. Our team at Gale, Angelo, Johnson & Pruett P.C. will guide you through the process of filing for bankruptcy from start to finish, assist with all of the necessary paperwork and provide the support you need during this time.
One question we often hear from our clients is – can bankruptcy eliminate tax debt? If you owe money to the Internal Revenue Service (IRS), you have to remember that you are not alone. Nearly four million Americans owe unpaid taxes to the government, but this is a unique type of debt that you may be able to settle when filing for bankruptcy. When you file for bankruptcy there is an immediate stay that is put on all collections for your tax debt – this means that all collections will be put on hold until your bankruptcy case is resolved. There are certain restrictions to keep in mind, but it is possible to find relief from tax debt. Here’s what you need to know about eliminating tax debt through bankruptcy.
Chapter 7 bankruptcy can help you eliminate tax debt if you meet certain requirements:
- Bankruptcy can only eliminate debt for unpaid income taxes.
- You can’t use bankruptcy to avoid unpaid taxes if you purposely avoided paying taxes or engaged in fraud.
- Your tax debt needs to be at least three years old in order to qualify under bankruptcy.
- You must have filed a tax return for the debt you are trying to eliminate at least two years before you file for bankruptcy.
- The income tax debt must be evaluated by the IRS at least 240 days before you file for bankruptcy.
There are also certain types of tax debt that are not eligible for bankruptcy:
- Other taxes owed, like payroll, cannot be discharged through bankruptcy, nor can any penalties that have accrued from these types of taxes. You can file for bankruptcy, but you will still be responsible to repay the taxes once your case has been settled.
- Tax liens do not qualify under chapter 7 bankruptcy, you will still have to pay them off when you sell your property.
- If you have unpaid property taxes within a year of filing for bankruptcy you will still have to pay them.
- Taxes that are automatically taken out of your paycheck for things like social security cannot be recovered through bankruptcy.
Before you file for bankruptcy it’s important to consult with your attorney to determine that this is the best solution for your unpaid debt and unpaid taxes. If you have unpaid taxes that do not qualify for bankruptcy it may be best to consider alternative financial relief solutions. You may be able to set up a payment plan with the IRS to help you pay down the debt, so you don’t accrue too much interest or penalties on the amount you owe.
To learn more about bankruptcy requirements and options in California, contact us directly at (916) 290-7778, or fill out the contact form below and a member of our team will be in touch to discuss your inquiry.