When an individual files for bankruptcy, their tax debt may be handled differently depending on the type of bankruptcy filing and the specific circumstances of the case. Here are the general guidelines:
- Chapter 7 Bankruptcy:
In Chapter 7 bankruptcy, most unsecured debts are discharged, meaning they are wiped out entirely. However, certain tax debts may not be dischargeable, such as those for which a tax return was not filed or those resulting from fraud or willful evasion of taxes. If a credit card is used to pay off a nondischargeable tax debt, the credit card balance will also be nondischargeable debt if a creditor files an "adversary proceeding" or bankruptcy lawsuit to challenge the dischargeability.
- Chapter 13 Bankruptcy:
In Chapter 13 bankruptcy, the individual sets up a repayment plan over a period of three to five years. Tax debts are generally included in the repayment plan, and the individual may be required to pay the full amount owed, or a portion of the debt depending on the specific circumstances. Unlike Chapter 7, in Chapter 13, you can discharge a credit card balance incurred due to paying off a nondischargeable tax debt.
- Priority Tax Debts:
If the tax debt is considered a priority debt, meaning it takes precedence over other debts, it cannot be discharged in either Chapter 7 or Chapter 13 bankruptcy. Priority tax debts include recent income taxes and taxes that were assessed within a certain period prior to the bankruptcy filing.
- Tax Liens:
If the IRS has placed a tax lien on the individual's property before bankruptcy, the lien will remain in place even after bankruptcy, unless it is avoided through a separate legal action. The Tax Lien will have to be paid before the property can be sold.
Overall, the treatment of tax debt during bankruptcy can be complex, and it is best to consult with a bankruptcy attorney or tax professional for guidance specific to your situation.
The focus of our practice is helping individuals and businesses resolve their IRS tax problems in the Las Vegas, Nevada, St. George, Utah areas, and elsewhere. If you or someone you know is dealing with IRS problems, contact me at 702-469-9426 or candy@numbercruncherllc.tax.
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