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What Bankruptcy Can & Cannot Do For Federal Tax Debt

Posted By Allmand Law Firm, PLLC || 24-Mar-2016

If you have federal tax debt, you may be wondering if filing for bankruptcy can do anything to help your situation. You may have even heard commercials offering the hope of eliminating tax debts in bankruptcy, but it’s actually not that simple. Most tax debts can’t be discharged by bankruptcy. And unfortunately, if you are being audited, a bankruptcy filing won’t stop the audit – it will simply suspend any collection actions while your case is pending.

Here’s a breakdown of what bankruptcy can and cannot accomplish when it comes to tax debt:

  • Chapter 7:
    • The taxes in question must be federal income taxes. You will still be responsible for paying property taxes, tax liens, fines, and penalties.
    • You must have filed a return for the debt you are trying to clear more than two years before filing and the tax year of the liability needs to be at least three years ago.
    • The tax liability must also have been assessed by the IRS at least 240 days before the filing.
    • If the debt is not eligible for discharge, the borrower may be able to offer in compromise or enter into an installment agreement to settle the debt.
    • Bankruptcy will not help if you attempted to evade paying taxes or filed a fraudulent return.
  • Chapter 13:
    • Under Chapter 13, you will be responsible for paying the non-dischargeable or priority tax debt off through a repayment plan while the unsecured, non-priority tax debt is eligible for discharge at the end of the repayment plan.
    • It is unlikely that you will be required to repay the full amount of tax debt you owe.
    • Even if your tax debt is classified as priority, you will still be able to pay it down throughout the course of the plan. This means that you will not have to liquidate in order to pay the full amount immediately.

There are a number of legal issues that can arise in the bankruptcy process, so if you have old tax debt, we strongly advise you to contact a Dallas bankruptcy lawyer at Allmand Law Firm, PLLC. We are available to assess your individual situation and recommend a course of action best suited to your needs. Our bankruptcy attorney is Board Certified in Consumer Bankruptcy by the Texas Board of Legal Specialization, so you can feel confident that your case will be in excellent hands.

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