Bankruptcy is a legal process that helps people or businesses get rid of their debts and start over. It doesn't erase all debts. It only helps clear some types of debt, such as credit card balances and medical bills. Other forms of debt, like student loans and child support, aren't eligible for bankruptcy protection. Some of the common questions are:
Does bankruptcy clear IRS debt?
Can bankruptcy clear tax debt?
How Bankruptcy Stop the IRS
As soon as you file for bankruptcy, an injunction called the automatic stay goes into effect to prevent creditors, including the IRS, from attempting or proceeding with their collection activity, including threatening letters, garnishing wages or bank accounts, or filing liens against your assets. This stay will continue for the duration of the bankruptcy case. It can only be lifted by the bankruptcy court, either at the creditor's request or if there is a good reason to do so.
The IRS is free to resume collection activity after the bankruptcy case. However, this ends if you pay your tax debt in full or are discharged from indebtedness. When you file for bankruptcy, the automatic stay will go into effect as soon as you do. But remember that it won't stay forever - if you'd filed for bankruptcy before, the stay may be lifted during your subsequent filing.
Can Bankruptcy Clear Tax Debt?
Taxes don't always get forgiven in bankruptcy. Taxes must meet the following criteria to be discharged:
You didn't make any fraudulent transactions with the intent to evade paying your taxes for the year in question.
Income taxes are due at least three years before filing for bankruptcy.
Taxes from paycheck or income from running a business.
You must have filed your taxes for at least two years before filing for bankruptcy. If you didn't file a return or the IRS filed one for you, some courts have ruled that those taxes will never be discharged.
Your taxes must have been assessed at least 240 days before bankruptcy—but if that weren't the case, you wouldn't be eligible for Chapter 13. The 240 days can also be reset if you file an offer in compromise or do a prior bankruptcy case.
If you meet all of these factors, your tax debt may be eligible for discharge. If not, it won't go away in a bankruptcy case.
What’s Next for Non-discharged Tax Debt?
The effect of bankruptcy on debtors varies depending on whether their personal or unsecured debt exceeds the state's limit on personal and unsecured debts. In many states, once a debtor becomes bankrupt, they can file for Chapter 7 liquidation bankruptcy, where all their assets are liquidated and the proceeds are paid to creditors.
In contrast, in some states, if a debtor's unsecured debt is less than the state's limit on personal debt, they can file for Chapter 13 bankruptcy, where the debtor proposes a three-to-five-year plan to repay their creditors.
Are you considering bankruptcy? It's important to know that this may not stop the IRS from collecting tax debts. Taxpayers who file for bankruptcy protection must still pay back their tax debts. They may need to do so by making monthly payments or by selling property or other assets
The Michigan bankruptcy attorneys at Moran Law Firm can help you through the entire bankruptcy process.
