Want to know more about taxes during bankruptcy?
If you’re worried about overdue taxes and have debts you cannot repay, bankruptcy may help you start fresh. Bankruptcy is a legal process allowing debtors to release many overdue payments, including some tax debts (Chapter 7 bankruptcy), or arrange reasonable payment plans for the debts (Chapter 13 bankruptcy).
People who have questions about whether it makes sense to file for bankruptcy with significant tax debts should speak to an experienced bankruptcy lawyer. There are many laws surrounding the discharge of tax debt and payment of taxes during bankruptcy that your lawyer can discuss with you. Bankruptcy law may seem simple on a quick web search, but navigating the legal system to reach an optimal outcome in bankruptcy is usually much smoother with a knowledgeable bankruptcy lawyer’s help.
Are overdue taxes dischargeable in bankruptcy?
Yes, often overdue taxes are a debt that you can discharge through bankruptcy. The laws vary slightly depending on whether you file for Chapter 7 or Chapter 13. If you file for Chapter 7, you can discharge overdue taxes you owed from before you filed the bankruptcy petition that are older than three years, unless you filed your returns late. If you file for Chapter 13, you can also discharge overdue taxes that are older than three years, unless you filed late. In addition, your repayment plan may include repayment of some or all of your tax debts. If you complete the repayment plan, the remainder of those debts will be discharged.
Can the government collect on tax debt during bankruptcy?
The short answer is no. During bankruptcy, the court imposes an “automatic stay” (a stop collections order) on your creditors, including tax collectors. There are some exceptions to the stay, but in general, federal and state tax debt collections are stopped during bankruptcy. Tax collectors will receive notice of your bankruptcy case, ordering them to cease collections attempts. However, remember that if a tax debt is not discharged during your bankruptcy, the government can often attempt to collect on it after your bankruptcy case is closed. The automatic stay and discharge laws can be confusing, especially since there are numerous exceptions. If you are worried about tax debts that you can’t repay right now, call a local bankruptcy lawyer for a free consultation.
Should you file and pay taxes while you’re in bankruptcy?
Yes, you are required by the IRS to file and pay taxes while you’re in bankruptcy. If you file for Chapter 7 or Chapter 13, you must file tax returns for the last four tax periods before your bankruptcy petition filing and then keep current on future tax filings due while your petition is pending and afterward. You also need to pay future taxes.
Can you receive a tax refund while you’re in bankruptcy?
You’ve dutifully filed your taxes while you’re in bankruptcy – now where’s your refund? If you’re due a tax refund, you may receive it from the IRS while your bankruptcy is ongoing, depending on when you filed for bankruptcy and which tax year the refund applies to. However, as the IRS website notes, “refunds may be subject to delay, to turnover requests by the Chapter 7 Trustee, or used to pay down your tax debts.” Why is this a possibility? The bankruptcy court views the refund as income. Unless an exemption applies or you employ a strategy to use the refunded money, you’ll probably have to turn over your tax refund for one year if you file for Chapter 7. In a Chapter 13 bankruptcy, it usually depends on the terms of your repayment plan and how much you’re paying.
Do you have to use a tax refund to repay debt while you’re in bankruptcy?
There are several options for exemptions under the bankruptcy code or strategies for spending your tax refunds that could help you hold onto this money. A good bankruptcy lawyer can look at your situation and advise how to handle incoming tax refunds. For instance, you may spend your tax refund on necessary items before filing for bankruptcy. You may also qualify for an exemption under federal or state laws. These laws allow you to keep assets you need for your life, such as housing, a car, and savings. Again, it’s important to get legal help to clarify which exemptions may apply to you depending on your circumstances.
For bankruptcy help when you’re in tax debt, call today
Contact an experienced bankruptcy attorney like those at the Law Offices of Alexzander C.J. Adams, P.C. to get the answers you need about your taxes and tax refunds if you file for bankruptcy. Our Greater Portland metropolitan area firm handles consumer bankruptcies for people in need of financial fresh starts. Please call us to schedule your free consultation at 503-278-5400 or fill out our online contact form to learn more.
