Is bankruptcy a solution for overdue tax debt?

Tax season has once again begun. Although this time of the year is not likely anybody's favorite, it can especially be hard for those already struggling with overdue income tax debt. If you are in this situation, you may have questions about whether bankruptcy would be able to help you. The answer to this question depends on your particular circumstances. However, for most people, bankruptcy would offer some assistance.

Dischargeable tax debt

Some income tax debt can be discharged outright in bankruptcy. Under the bankruptcy laws, tax debt may be eliminated if four things are true:

· The tax debt must have been due for 3 years before filing bankruptcy. If you received any extensions from the IRS, 3 years must have passed since the new due date.

· You must have filed the tax return for the debt in question 2 years before filing bankruptcy.

· The debt must have been assessed by the IRS at least 240 days before bankruptcy.

· You must not have attempted to file a fraudulent return or evade paying the tax debt.

If your tax debt meets these four criteria, it may be discharged. Once discharged, you are relieved of the legal obligation to pay it.

What happens if you do not qualify for a discharge?

If your tax debt does not qualify for a discharge, bankruptcy may still be able to help you. If you are overburdened by other debts, filing Chapter 7 bankruptcy may be able to help. Since this type of bankruptcy eliminates your credit card debt, medical bills and most unsecured debt, it can free up a significant portion of your income. Once rid of these debts, you can devote more of your financial resources to paying down your tax debt.

If your tax debt is larger (or you have few other debts), Chapter 13 may be a better approach. During this type of bankruptcy, your tax debt is consolidated into the payment plan. Under the plan, you have 3-5 years to catch up with your overdue taxes by paying it off in monthly installments. As you are paying off the debt, you are protected against wage garnishment and other collection attempts by the IRS. Additionally, if you filed your tax returns on time, you do not have to worry about penalties or interest accruing on your debt in Chapter 13.

To learn more about whether bankruptcy would be a logical next move, it is advisable to speak with an experienced bankruptcy attorney. An attorney can consider your unique debt situation and outline the solutions available to you.

Frequently Asked Questions

  • I hear bankruptcy is a lot harder to file now. What is the difference?
    • Since Congress passed the new bankruptcy law in 2005, it is necessary to take two bankruptcy counseling courses. The first bankruptcy counseling course must be taken before you can file your bankruptcy petition, and the second bankruptcy counseling course must be taken before the court will issue the discharge order relieving you from your debt. Both bankruptcy counseling courses can be taken on-line for a small fee, and can be done in a few hours.

      There are also stricter requirements on who can get a total discharge of debts under a Chapter 7 bankruptcy. You must earn under a certain annual income for your area of residence, or you must be able to pass a means test provided for by the bankruptcy law. Under this means test, your income is matched against a formula for average monthly expenses in your area of residence to determine your monthly disposable income. Your debts are compared with your monthly disposable income to determine if you can afford to pay your debts. If you do not pass the means test, you may still get bankruptcy protection through a Chapter 13 bankruptcy where you pay some or all of your debts through a payment plan. While these restrictions limit some people, the bankruptcy attorneys at Bailey & Gunderson have found that the vast majority of people who need the protection of a bankruptcy are still able to take advantage of it.

  • Can I get all debts discharged through Bankruptcy?
    • Under Chapter 7 bankruptcy, you may get a total discharge of your debt. However, some of your debts may not be dischargeable. For instance, income taxes may not be discharged except where the debt is at least three years old, and you filed your income tax return timely. Student loans and child & spousal support obligations are also not dischargeable. Debts incurred through fraud are, likewise, not dischargeable. You may, however, apply to pay these debts through a Chapter 13 payment plan. The bankruptcy attorneys at Bailey & Gunderson can show you how.

  • What happens in a Chapter 13 bankruptcy plan?
    • In a Chapter 13 Bankruptcy plan, you typically pay your debts over a 3 to 5 year period. Each month, you make a payment amount (usually through a wage deduction order from your paycheck) which is then distributed by the bankruptcy trustee to your creditors. Secured debts, such an automobile loan, shall be paid through your Chapter 13 bankruptcy plan. Your non-secured debts will be paid from 1% to 100% of the total amount of your non-secured debt, and will be paid interest-free. The percentage of your non-secured debt that you must pay will initially be determined by the bankruptcy attorneys at Bailey & Gunderson. Once you have completed your Chapter 13 Bankruptcy plan, any remaining debts not paid through your Chapter 13 bankruptcy plan shall be discharged.

  • Will I lose my house, car or retirement savings by filing Bankruptcy?
    • The bankruptcy attorneys at Bailey & Gunderson will work with you to minimize the assets (if any) you may have to surrender when you file for bankruptcy. You are entitled to keep a certain amount of assets, which are "exempt", from seizure by creditors or the bankruptcy trustee. If the Chapter 7 bankruptcy exemptions do not provide enough protection, the bankruptcy attorneys at Bailey & Gunderson can develop a Chapter 13 bankruptcy plan that will preserve your assets.

      Working without an attorney, or with inexperienced counsel, may result in unpleasant surprises for you, as you may have to forfeit assets that you could have saved with better planning. The bankruptcy attorneys at Bailey & Gunderson can show you how.

      The attorneys at Bailey & Gunderson have filed over 1,000 bankruptcy cases. We offer a free initial consultation, and reasonable payment plans for our bankruptcy clients.

      Since 1995, the law firm of Bailey & Gunderson has assisted bankruptcy clients in the greater Cincinnati area (Hamilton, Clermont, Butler, Warren, and Brown Counties). If you have questions or need information about bankruptcy, please call our Cincinnati office at 866-540-8424, or email us.

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    • A dissolution of marriage offers many advantages over a traditional divorce. The first consideration for many couples is that a dissolution of marriage is a much faster process than a contested divorce. Once your petition for dissolution of marriage has been filed, a hearing before a judge or magistrate shall occur within 30 to 45 days. A dissolution of marriage is usually much less expensive - both in terms of attorney fees and costs, as well as emotionally, because the spouses resolve the issues between them by agreement.

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