What Happens to Your Family If You Owe Back taxes in Bankruptcy?
Back tax is one of the most prominent reasons why people file for bankruptcy relief. Income tax debt is probably the most common type of debt people owe; although this type of debt is not completely discharged during bankruptcy, a discharge may be given on some old tax debt.
Let’s expatiate more on back taxes to educate you on the best ways to handle back taxes
Is Income Tax Debt Dischargeable in Bankruptcy?
Bankruptcy does not discharge most of the debt owed to the government—income tax is one of those debts that can’t be discharged. However, in an instance where your income tax debt meets the criteria below, then you will get a bankruptcy discharge.
Criteria to meet if you want to get a bankruptcy discharge on tax debt:
- The tax debt must be personal income tax
- The debt must have been due for a minimum of three years prior to filing a bankruptcy petition.
- You must have filed a tax return that is associated with the income taxes for at least two years before filing a bankruptcy petition.
- IRS must have accessed the income tax debt at a minimum of 240 days before the bankruptcy petition was filed.
If your income tax debt meets the criteria given above, then you can get a bankruptcy exemption.
How is personal Income Tax Treated in Chapter 7 Bankruptcy?
If you meet the criteria above, a Chapter 7 bankruptcy discharge will eliminate your income tax debt. However, in an instance where your income tax debt is not discharged, your debt will remain even though you just got a Chapter 7 bankruptcy discharge. It is almost impossible to come up with a repayment plan with your state tax authority or IRS after getting a bankruptcy discharge.
It is important to note that Chapter 7 bankruptcies can vary slightly from state to state. So, if you decide to file for Chapter 7 bankruptcy in Oklahoma, it may look slightly different from a Chapter 7 bankruptcy in California.
How Personal Income Taxes Are Treated in Chapter 13 Bankruptcy
An income tax debt is seen as an unsecured debt if it meets the criteria for getting a bankruptcy discharge. Since unsecured creditors are paid a portion of the debt before the debtor get a bankruptcy discharge, the same thing applies here. IRS and state tax authorities will be paid a portion of the debt owed through a Chapter 13 repayment plan that is approved by the bankruptcy court. Any part of the debt that remains after getting a bankruptcy discharge will be erased.
However, in an instance where your income tax debt does not qualify for a bankruptcy discharge, then your income tax debt is treated as a priority unsecured debt—this type of debt must be paid completely through your Chapter 13 repayment plan. As such, your Chapter 13 plan will be calculated in a way that will accommodate all the money you owe tax authorities in your state and the IRS.
The tax debt is easy to pay back through the Chapter 13 payment plan because its payment is calculated such that it will be completed after some years. However, you need to be careful not to incur penalties and interest by failing to meet up with your financial obligations to the bankruptcy plan.
How are Other Taxes Treated in Chapter 7 and Chapter 13 Bankruptcy?
Normally, most taxes owed to state tax authorities and IRS are not dischargeable by either a Chapter 7 or Chapter 13 bankruptcy. Some tax debts that are not wiped off by a bankruptcy discharge are:
- Sales tax
- Employment tax
- Payroll withholding tax
- Real estate property tax
- Tax liens
- Tax refunds overpayment
- Customs duties and excise taxes
Even if you file for Chapter 7 bankruptcy, you’re still financially obligated to pay the above taxes. You should find a way to negotiate a payment plan with tax authorities if you don’t want them to come after your assets.
If you file for a Chapter 13 bankruptcy case, you can request for your tax liability to be included in your Chapter 13 bankruptcy payment plan. Your tax liability will first be categorized into unsecured, priority debt, secured debt, and general unsecured debt. The category where your tax debt falls into will determine whether you will be asked to settle your debt in full or partially. Keep in mind that requirements and processes may vary depending on where you file bankruptcy. So, if you plan on filing for a Chapter 7 bankruptcy in Florida, you will need to be aware of Florida’s bankruptcy requirements and processes.
Complications
Even though we tried to make the process of determining whether an income tax is dischargeable or not simple, it’s actually more complicated than it seems. The latest alteration to the Federal Tax Code and the Bankruptcy Code made it very difficult to discharge tax debt in a bankruptcy plan. Also, there are new rules for determining the exact amount of debt tax owed as penalties and interest can accrue and be added to your priority tax debts.
If you owe a tax debt, the best action to take is to hire a bankruptcy attorney to help you file your bankruptcy case. Your bankruptcy attorney should be one with experience and have a top-notch knowledge of tax laws, and the bankruptcy code is needed.
Thank you,
Glenda, Charlie and David Cates
