Filing for bankruptcy is one of the most effective ways to eliminate debt, save your home, and rebuild your financial security. It can also help you sleep easier at night knowing that you won’t have to worry about repossession or mounting bills. However, if you’re considering bankruptcy, it’s important to know what it does and does not cover – and that includes taxes.
How Do Taxes Work After Bankruptcy?
Many people overlook their tax situation when filing for bankruptcy, but it’s crucial to know what to expect before moving forward with your case. Your tax requirements will look different depending on which type of bankruptcy you are filing for. Here is a brief overview of how taxes work after filing for the two most common types of bankruptcy:
This chapter of bankruptcy is meant to help those with lower income and fewer assets, and individuals must pass a “means test” in order to qualify. If granted chapter 7 bankruptcy, individuals will be assigned a trustee that will be responsible for reviewing your petition and seizing any nonexempt assets that can be sold to benefit your creditors.
Taxes are still a requirement even if you are granted chapter 7 bankruptcy. If you are unable to pay your taxes and accrue new debt, it can have a negative impact on your case and may even result in your case being dismissed. However, if you are expecting a tax refund but are granted chapter 7 bankruptcy, then you may need to turn the funds over to your trustee who will use them to pay your creditors.
This chapter of bankruptcy is meant to help those with higher income and more assets, and it is often considered a “reorganization” of debt. Individuals who are granted chapter 13 bankruptcy will need to establish a monthly payment plan with their creditors to repay a portion of their debts.
Taxes are also still required if you are granted chapter 13 bankruptcy. If you owe more than you can pay, you may be able to set up a payment plan with the IRS lasting between three and five years. Meanwhile, if you receive tax refunds while in Chapter 13 you’ll usually be able to keep these refunds for your own benefit.
Can Bankruptcy Discharge Tax Debt?
Tax debt is considered “unsecured debt”, which means that it generally cannot be discharged even if you are granted bankruptcy. That said, if your tax debt meets a few specific criteria, you may be able to discharge it when filing for chapter 7 bankruptcy. Your debt may be considered for discharge if it meets these requirements:
- The tax return filing was due three or more years ago.
- The tax return filing was two or more years ago.
- The tax assessment is at least 240 days old.
- The tax return was not fraudulent.
- The taxpayer did not attempt tax evasion.
Your Local Bankruptcy Attorneys
Filing for bankruptcy can be overwhelming, but you don’t have to navigate it all alone. The experienced bankruptcy attorneys at OlsenDaines are prepared to help get you through the process as quickly and easily as possible while answering all of your questions. We have proudly served Oregon and Washington residents for over 40 years, and we are ready to use our expertise to help you relieve your debt. To get started, schedule your free and no-obligation legal consultation with one of our attorneys today!