Can IRS Debt Be Discharged in Chapter 13 Bankruptcy?

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What is Chapter 13 Bankruptcy?

Chapter 13 bankruptcy is a legally codified financial process designed to help individuals facing overwhelming debt and economic difficulty. It allows qualified persons to pay off their debt in a structured manner over three or five years. The purpose of Chapter 13 is to help debtors regain control of their finances while repaying as many creditors as possible.

Chapter 13 repayment plans are designed to be manageable and are based on income, assets, type of debt, living expenses and an individual’s general financial situation. Chapter 13 repayment plans cover personal debt and certain business debt, as well as tax debt and money owed to the IRS. Each debt’s financial and legal status and how it needs to be repaid depends on that obligation’s specific terms, details and relevant laws and regulations.

How Does Chapter 13 Bankruptcy Differ from Chapter 7 Bankruptcy?

Unlike Chapter 7 bankruptcy, which requires individuals to sell off assets to meet their financial needs and obligations, Chapter 13 allows debtors to keep most of their property as long as they meet the conditions of their bankruptcy repayment plan. Chapter 7 bankruptcy is considered harsher and more disruptive to a person’s life as it often requires extensive liquidation. Chapter 7 is primarily for insolvent individuals with low incomes or high amounts of unsecured debts they can’t realistically pay back.

Conversely, Chapter 13 allows individuals with stable incomes to repair and improve their financial situation without losing their assets. Chapter 13 bankruptcy offers debtors a month-to-month repayment plan to manage their finances better, pay off existing debt, cover living expenses and achieve a fresh financial start. For otherwise financially healthy individuals, Chapter 13 generally offers a much better solution than Chapter 7 bankruptcy because it allows debtors to maintain their daily lives as they pay off their debt obligations in a slow, steady, and structured manner.

Can IRS Tax Debt Be Discharged in Chapter 13 Bankruptcy?

Many individuals struggling with personal and business debt also face challenges paying off tax and IRS debt. These tax debts can include current tax obligations as well as back taxes. Chapter 13 provides a path for paying off or eliminating tax debt as part of the structured repayment process. The good news is that in some instances, debtors may not need to repay all tax or IRS debts in full. Chapter 13 can sometimes fully or partially discharge IRS and general tax debt, depending on the situation.

The IRS collects many types of taxes, including personal and corporate income, payroll, estate, gift, and excise taxes. For many individuals in Chapter 13, IRS personal income tax debts are the primary concern. However, it’s essential to understand every tax obligation concerning the IRS and overall Chapter 13 proceedings.

How Are IRS Income Tax Debts Treated in Chapter 13 Bankruptcy?

How IRS income taxation debts must be repaid typically depends on whether the tax obligation is a priority or nonpriority tax debt. Priority debts and taxes must always be paid in full during the Chapter 13 process. On the other hand, nonpriority taxes may only need to be partially repaid as they are grouped with other unsecured debts such as credit cards and medical bills.

Unsecured nonpriority creditors each share and receive payment from the discretionary income portion of a Chapter 13 repayment plan. Discretionary income is the monthly amount that remains in a debtor’s payment plan after deducting allowed living expenses such as house and car payments.

Because each nonpriority debt receives only a limited part of the finite, remaining discretionary monthly income, some nonpriority debts – including nonpriority tax and IRS debts – will not be fully paid off when an individual completes the three or five-year Chapter 13 repayment timeline. These unpaid nonpriority debts, which can include nonpriority tax and IRS debts, will be permanently discharged and eliminated once the Chapter 13 bankruptcy payment plan concludes.

What Are Nonpriority Taxes?

Taxes are classified as nonpriority if they meet the following conditions:

The taxes are on income or gross receipts.

The tax deadlines (including legitimate extensions) were at least three years before the individual filed for bankruptcy.

The individual filed tax returns at least two years before they filed for Chapter 13 bankruptcy. If the individual did not file a tax return on time or the IRS filed a substitute one, those taxes may be considered priority.

The IRS formally assessed the tax as a liability at least 240 days before the individual filed for bankruptcy.

The individual did not commit unlawful tax fraud or invasion during the corresponding tax year.

Individuals who meet the conditions above may have certain IRS debts treated as nonpriority, meaning they can be fully or partially discharged upon completing the Chapter 13 repayment plan. However, if the conditions are not met, the outstanding tax obligation will be treated as a priority debt and must be fully repaid.

What Are Priority Taxes?

By definition, priority taxes are any taxation debts that do not qualify as nonpriority taxes. This category can include recent income and any taxes that don’t fulfill nonpriority requirements. However, certain IRS tax obligations are always priority taxes. IRS priority taxes that need to be paid in full during Chapter 13 repayment include:

Trust fund taxes, including Federal Insurance Contributions Act (FICA), Medicare, Social Security and any other federal income that employers withhold from their employee’s paychecks

Excise taxes on certain goods, activities or transactions, such as those related to alcohol, tobacco, gasoline, firearms and environmental regulations

Penalties such as Trust Fund Recovery Penalties (TFRP), late filing and late payment penalties, fraud penalties, penalties for underpayment of estimated taxes and other penalties for non-dischargeable taxes

Fraudulent or erroneous refunds or credits on non-dischargeable taxes

Secured debts such as tax liens filed by the IRS against the properties of individuals who owe significant tax payments.

Priority federal taxes must be paid in full to the IRS, along with any applicable fees and penalties. Individuals must also pay any additional priority taxes to the relevant taxing authorities.

In most cases, debtors must speak with their bankruptcy attorney or personal accountant to determine what counts as a priority or nonpriority tax and how best to proceed with Chapter 13 repayment. The Chapter 13 process is extremely helpful for individuals struggling with personal, business, general taxation and IRS debt. However, it can also be complicated and specific, so hiring an appropriate tax, legal or financial bankruptcy professional is always advisable. The good news is that under the right circumstances, it is possible for individuals to partially or fully discharge tax and IRS debt and move forward into a brighter and healthier financial future.

Eliminating Tax Debt

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Regarding financial well-being, no one wants the burden of tax debt to weigh them down. Whether you’re a small business owner coping with IRS liens or an individual overwhelmed by the amount they owe in back taxes, eliminating your tax bill can be daunting and confusing. This blog post provides an overview of what you need to know about getting rid of your tax debt to move forward confidently toward financial freedom.

Understanding Tax Debt

Tax arrears occurs when taxpayers owe the Internal Revenue Service (IRS) money in back taxes. Generally, this is caused by an individual needing to pay all their tax liabilities due for a certain period, either through late or nonpayment payments. Once this happens, penalties and fees can accumulate on your debts. Depending on the circumstances, a taxpayer may be able to negotiate with the IRS to reduce their debt or enter into an installment agreement.

Options for Eliminating Tax Debt

Several options are available when it comes to getting rid of tax-debt. These include:

• Bankruptcy: Bankruptcy is another option for discharging tax bill. Tax bill is often considered unsecured, meaning it can be eliminated or discharged in bankruptcy. However, depending on their circumstances, this option may only be ideal for some. Individuals who file for Chapter 7 or Chapter 13 bankruptcy can have their tax debt reduced, but it’s important to remember that some taxes are not dischargeable.
• Payment Plans: The IRS offers payment plans for taxpayers who are unable to pay their full tax liability at once. These plans allow taxpayers to spread their payments over a set period, usually up to 72 months (6 years). While this option may be the best for some, it can come with hefty interest and penalties.
• Offer in Compromise: If you are unable to pay your taxes in full or via an installment agreement, the IRS may accept what is known as an “offer in compromise” (OIC). With this option, taxpayers can offer to pay less than what they owe, often in a lump sum. To be eligible for an OIC, the taxpayer must prove that paying the full amount would create undue financial hardship.
• Federal Tax Lien: In some cases, the IRS may file a federal tax lien against a taxpayer. This official claim gives the IRS the right to take property or assets to pay off a tax arrears. A tax lien can severely damage an individual’s credit score and make accessing loans or other financial products more difficult. It can also make it difficult for them to sell or transfer property. Taxpayers who have had a federal tax lien filed against them may be able to get it removed if they pay off the full debt amount or enter into an acceptable repayment plan with the IRS.

Chapter 7 Bankruptcy and Tax

Chapter 7 bankruptcy is a legal process in which debtors can discharge most unsecured debts, including tax bill. This type of bankruptcy is designed to relieve people struggling with overwhelming debt. To qualify for Chapter 7 bankruptcy, individuals must pass the means test. This test determines whether or not their income is below a certain level. If it is, then they can file for Chapter 7 bankruptcy and have their tax debt discharged.

A means test entails comparing an individual’s income to the median income for their state. If their income is lower than the median, they can file for Chapter 7 bankruptcy and have their tax arrears wiped out. Taxpayers who don’t pass the means test might still be able to qualify if certain other circumstances are present, such as a high amount of medical expenses.

Chapter 13 Bankruptcy and Tax

The other type of consumer bankruptcy is Chapter 13 bankruptcy, which involves repaying some or all of your creditors through a court-approved repayment plan. With Chapter 13, taxpayers can agree with the IRS to pay back their tax bill over time. This option can be more advantageous than Chapter 7 for those who can afford to pay off some of their debt and wish to avoid having it fully discharged.

In a Chapter 13 bankruptcy, creditors are paid back through a set repayment plan lasting up to five years. During this period, the IRS will cease any collection activities, and interest charges will not accrue on your debt. The court will discharge any remaining tax debt when the repayment plan is complete.

Taxpayers should understand that the IRS has the right to object to a repayment plan or any part of it, so it is important to consult a qualified attorney before attempting to negotiate or settle a tax arrears through bankruptcy.

What Happens If You Fail to File Returns Before the Creditors’ Meeting?

If you fail to file your tax returns before the creditors’ meeting, the court may grant a motion for a substitute return. This means the IRS will prepare an estimate of your taxes owed based on their available information. The court can then use this return to determine how much of your debt needs to be paid to creditors through the repayment plan.

It is important to remember that a substitute return can only be used if you have yet to file your taxes. If you can provide your tax returns before the meeting, the court will use those instead to determine how much your debt needs to be repaid.

Unfortunately, substitute returns often result in more tax bill than if you had filed your returns. This is because the IRS may only have access to some of the deductions and credits available to taxpayers. Therefore, filing your returns before the meeting is important for ensuring that only accurate information is used to determine how much your debt needs to be repaid.

Winding Up

Filing for bankruptcy can be difficult, but it is important if you struggle with overwhelming tax arrears. Understanding how Chapter 7 and Chapter 13 bankruptcy affect your taxes can help you decide the best way to address your financial situation. Additionally, it is important to work with a qualified attorney and tax professional when considering bankruptcy to address your tax bill.

Experienced attorneys can help you understand the process and make sure you are making the best decisions for your financial future. By following these tips, you can ensure that you take the necessary steps to address your tax debt and move on with your life. With the right strategy, filing for bankruptcy can be an excellent way to get relief from overwhelming tax arrears.

Can You File Bankruptcy on IRS Debt?

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Unpaid taxes can add up to a huge financial burden, especially on top of all your other expenses. And with more and more people freelancing and the gig economy in full swing, it’s not uncommon for people to have IRS debt. If you’re feeling overwhelmed by your financial situation, you may be considering bankruptcy. Bankruptcy is a good way to clear unsecured debt, but what about tax debt? This post explores the question of what happens with tax debt when you file for bankruptcy.

Automatic Stay

The moment that you file for bankruptcy, whether it is Chapter 7 (most commonly) or Chapter 13, all your creditors must stop harassing you for payment. That includes the IRS. So no more threatening letters, phone calls, etc. The automatic stay also applies to property. The IRS can’t touch your more valuable assets. So no matter what stage the IRS collection effort is in, the automatic stay stops it completely. However, an automatic stay is just a pause. If you want to eliminate IRS debt as well as other debts, choosing the right time to file for bankruptcy is crucial.

Conditions for Tax Debt to be Discharged

You may be unsurprised to learn that IRS rules and regulations are like an impenetrable maze. There is a regulation for almost everything, including specific rules for bankruptcy discharge. You should expect that the IRS will object to eliminating your tax debt if it can find any reason to do so. That’s why it is especially important to have expert legal counsel if you are trying to eliminate IRS debt.

Income Taxes

Chapter 7 bankruptcy only discharges income tax debt. Your 1040 taxes are obviously income taxes, but other taxes are not. For instance, property taxes and trust fund taxes are definitely not income taxes. So the kind of taxes you owe the IRS makes all the difference. If you do owe unpaid income taxes, then that IRS debt can be discharged. Then there are some rather complicated regulations dependent on timing.

Taxes Filed for Last 2 Years

You have to have filed your taxes for at least the last 2 years (if you were required to file). At the time you file for bankruptcy, the IRS needs to have your tax filings for the previous 2 tax years, and that applies whether or not you filed those taxes on time. If you didn’t file and the IRS prepared substitute returns to determine what you owed, those do not count as taxpayer-filed returns.

Tax Debt Must Be at Least 3 Years Old

Your income tax debt must be at least three years old. And it’s crucial to remember that Tax Day is not always April 15. Some years, it could be the 16th, 17th, or even 18th. In 2020 it was July 15 because of the COVID-19 pandemic. IRS lawyers have been known to object to discharge if the timing is off even by one or two days. So, make sure you file the petition on the correct day, or else you will have to start over.

240 Day Rule

Your tax assessment can’t be more than 8 months old, or must not have been assessed yet. If the IRS has not assessed the debt within the last 240 days, the income tax debt is not dischargeable. It’s almost impossible to tell if the IRS has assessed the debt or not, because this process is an internal accounting tool. But generally, if you’ve not received a bill which breaks down the amount due by tax years, the IRS has probably not assessed the debt yet.

Burr Law Helps with Complexities

At Burr Law, our professionals have years of experience dealing with bankruptcy law. We understand the complicated IRS rules around bankruptcy, and will work with them to make sure your tax debt is included in your bankruptcy. Don’t leave something this important to chance.

Does Bankruptcy Clear Tax Debt?

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If you have any tax debt and you are considering bankruptcy, it is absolutely essential that you work closely with experts in bankruptcy law and IRS regulation. It is indeed possible to eliminate tax debt when filing Chapter 7 bankruptcy, but it is not easy to do so. In this post, we will explore how bankruptcy can clear tax debt.

Criteria

You won’t be surprised to find out that IRS rules and regulations are complex, and even more so around tax debt and bankruptcy. You should expect that the IRS will object to eliminating your tax debt if it can find any reason to do so. There are a number of conditions that must be met before tax debt is eligible to be discharged through bankruptcy. Briefly they are:

  • You did not deliberately evade paying your taxes or file a fraudulent return
  • Your tax debt is at least 3 years old
  • You have filed a tax return for the 2 years prior to your bankruptcy filing
  • Your tax debt assessment can’t be over 8 months old, or not yet done

Automatic Stay

The moment that you file for bankruptcy, whether it is Chapter 7 (most commonly) or Chapter 13, all your creditors must stop harassing you for payment. That includes the IRS. The automatic stay also applies to property. So no matter what stage the IRS collection effort is in, the automatic stay stops it completely. However, an automatic stay is just a pause. If you want to eliminate IRS debt as well as other debts, choosing the right time to file for bankruptcy is crucial.

Income Taxes

Chapter 7 bankruptcy only discharges income tax debt. Your 1040 taxes are obviously income taxes, but other taxes are not. For instance, property taxes and trust fund taxes are definitely not income taxes. So the kind of taxes you owe makes all the difference. If you do owe unpaid state or federal income taxes, then debt can be discharged. Then there are some rather complicated regulations dependent on timing.

Taxes Filed for Last 2 Years

You have to have filed your taxes for at least the last 2 years (if you were required to file). At the time you file for bankruptcy, your tax returns need to be with the appropriate state tax department and with the IRS. This applies whether or not you filed those taxes on time. If you didn’t file and the IRS prepared substitute returns to determine what you owed, those do not count as taxpayer-filed returns.

Tax Debt Must Be at Least 3 Years Old

Your income tax debt must be at least three years old. And it’s crucial to remember that Tax Day is not always April 15. Some years, it could be the 16th, 17th, or even 18th. In 2020 it was July 15 because of the COVID-19 pandemic. IRS lawyers have been known to object to discharge if the timing is off even by one or two days. So, make sure you file the petition on the correct day, or else you will have to start over.

240 Day Rule

Your tax assessment can’t be more than 8 months old, or must not have been assessed yet. If the IRS has not assessed the debt within the last 240 days, the income tax debt is not dischargeable. It’s almost impossible to tell if the IRS has assessed the debt or not, because this process is an internal accounting tool. But generally, if you’ve not received a bill which breaks down the amount due by tax years, the IRS has probably not assessed the debt yet.

Burr Law Helps with Complexities

At Burr Law, our professionals have years of experience dealing with bankruptcy law. We understand the complicated IRS rules around bankruptcy, and will work with them to make sure your tax debt is included in your bankruptcy. Don’t leave something this important to chance.

Tax Debt – Filing for Bankruptcy in 2021

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With more and more people free-lancing and the gig economy in full swing, it’s becoming more common for people to owe the IRS for back taxes. And unpaid taxes can add up to a huge financial burden, especially on top of all your other expenses. If you’re feeling overwhelmed by your financial situation, you may be considering bankruptcy. Bankruptcy is a good way to clear unsecured debt, but what about tax debt? This post explores the question of what happens with tax debt when you file for bankruptcy.

Automatic Stay

The moment that you file for bankruptcy, whether it is Chapter 7 (most commonly) or Chapter 13, all your creditors must stop harassing you for payment. That includes the IRS. So no more threatening letters, phone calls, etc. The automatic stay also applies to property. The IRS can’t touch your more valuable assets. So no matter what stage the IRS collection effort is in, the automatic stay stops it completely. But remember, this is just a pause. And as you’ll see, knowing when to file for bankruptcy is especially important if you’re trying to eliminate unpaid taxes as well as other debts.

Conditions for Tax Debt to be Discharged

As you probably already know, IRS rules and regulations can be like an impenetrable maze. There is a regulation for pretty much everything. So, it should be no surprise that there are specific rules for bankruptcy discharge. And you should expect that the IRS will object to eliminating your tax debt if it can find any reason to do so. The main bankruptcy discharge rules have to do with time.

Income Taxes

Chapter 7 bankruptcy only discharges income tax debt. Your 1040 taxes are definitely income taxes, but other taxes aren’t. For instance, property taxes and trust fund taxes are definitely not income taxes. So the kind of taxes you owe the IRS makes all the difference. If you do owe unpaid income taxes, then you’ve cleared the first hurdle.

Taxes Filed for Last 2 Years

You have to have filed your taxes for at least the last 2 years (if you were required to file). At the time you file for bankruptcy, the IRS needs to have your tax filings for the previous 2 tax years, and that applies even if you filed those taxes on time. If you didn’t file and the IRS prepared substitute returns to determine what you owed, those do not count as taxpayer-filed returns.

Tax Debt Must Be at Least 3 Years Old

Your income tax debt must be at least three years old. And it’s crucial to remember that Tax Day is not always April 15. Some years, it could be the 16th, 17th, or even 18th. Last year (2020) it was July 15 because of the pandemic. IRS lawyers have been known to object to discharge over one or two days. So, make sure you file the petition on the correct day, or else you will have to start over.

240 Day Rule

Your tax assessment can’t be more than 8 months old, or must not have been assessed yet. If the IRS has not assessed the debt within the last 240 days, the income tax debt is not dischargeable. It’s almost impossible to tell if the IRS has assessed the debt or not, because this process is an internal accounting tool. But generally, if you’ve not received a bill which breaks down the amount due by tax years, it’s probably not assessed the debt yet.

Burr Law Helps with Complexities

At Burr Law, our professionals have years of experience dealing with bankruptcy law. We understand the complicated IRS rules around bankruptcy, and will work with them to make sure your tax debt is included in your bankruptcy. Don’t leave something this important to chance.

Tax Returns and Bankruptcy: Do I Get to Keep My Refund in Bankruptcy?

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Before exploring the status of any tax refunds, let’s be clear about taxes owed. If you owe taxes, that debt will not be discharged during bankruptcy, whether you file Chapter 7 or Chapter 13 unless 1) that tax debt more than 3 years old; 2)there was nothing fraudulent about the tax returns; 3) and the tax was not assessed within 240 days of filing the bankruptcy petition. Business tax debts cannot be discharged. That said, the status of any tax refunds is not so clear-cut. So the answer to the all important question “Do I get to keep my refund in bankruptcy?” is “It depends.” The issue of tax refunds during bankruptcy is one of a number of complex questions that can arise during bankruptcy. That’s why it is essential to consult with professionals, like the experts at Burr Law, who deal with the intricacies of bankruptcy law every day.

 

Exemptions

Whether you file Chapter 7 or Chapter 13 bankruptcy, you are entitled to exemptions. There are both federal and state exemptions, and Wisconsin is one of only 19 states that allows you to choose which set of exemptions you use. It’s important to note that you must choose one or the other; you cannot mix-and-match the exemption rules. The experts at Burr Law can help you determine which is better for your particular situation. While Wisconsin does not have a specific federal or state tax refund exemption, you can protect it with a wildcard exemption if you are able to use the federal bankruptcy exemptions. Should you choose, your tax refund can become an asset protected through your exemptions, and you would then retain it.

 

Necessary Expenses

Your tax refund may be automatically deposited into your bank account. Can you spend those funds? If you spend your tax refund on necessary expenses like mortgage or rent payments, that is allowable. Other necessary expenses include food, medical expenses, and clothing. While your tax refund counts as an asset, you are allowed to spend money on necessary expenses, and that applies equally to money gained from a tax refund. Basically, as long as you are not spending it on luxury items, it’s all right for you to spend the tax refund you receive. You can also use your tax refund to pay your bankruptcy attorney and associated court costs.

 

Timing – Not Yet Filed

If you have not yet filed bankruptcy, but plan to do so within the year, it is a good idea to adjust your withholding to minimize any refund you may receive. This must be done carefully; if you miscalculate and end up owing taxes, those become non-dischargeable debts. Another way to plan ahead for bankruptcy is to designate more of your income to your employer IRA or 401k. Those retirement contributions will not become assets liable to exploitation during bankruptcy. Pre-planning for bankruptcy will help you avoid the question altogether.

 

Timing – Refund From Income After Filing

Any refund that results from income you earned after filing for bankruptcy is yours free and clear. Also, if any portion of the refund results from income you earned after the filing date, that portion is available to you without restriction. Again, this is a delicate calculation and it is vital that you have an experienced bankruptcy attorney from Burr Law to guide you through the process. You want to adhere to the law in all instances.

 

The issue of tax returns during bankruptcy is complex. With the experts at Burr Law, you can feel confident that all of your individual circumstances will be carefully considered. We will find the best possible solutions for your financial situation.

Can I Keep My Tax Return During Bankruptcy?

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If you are considering filing bankruptcy, or have already done so, you may be anticipating filing your taxes and wondering how taxes owed or refunds received will work into a bankruptcy proceeding. This post will explore how your tax return affects your bankruptcy.

Before exploring the status of any tax refunds, let’s be clear about taxes owed. If you owe taxes, that debt will not be discharged during bankruptcy, whether you file Chapter 7 or Chapter 13. Also, any overdue taxes or penalties will remain.

Tax Refunds Are Assets

You may have received your refund directly into your bank account, the refund may be in process, or the refund may result from the taxes you file for the previous year. Any way you look at it, tax refunds are assets. And when you file for bankruptcy all of your assets become part of the proceedings. That fact does not necessarily mean that you will lose your tax refund. Whether you keep all or a portion of it depends on a variety of factors.

Timing – Not Yet Filed

If you have not yet filed bankruptcy, but plan to do so within the year, it is a good idea to adjust your withholding to minimize any refund you may receive. This must be done carefully; if you miscalculate and end up owing taxes, those become nondischargeable debts. Another way to plan ahead for bankruptcy is to designate more of your income to your employer IRA or 401k. Those retirement contributions will not become assets liable to exploitation during bankruptcy.

Protect Refund With Exemptions

Whether you file Chapter 7 or Chapter 13 bankruptcy, you are entitled to exemptions. There are both federal and state exemptions, and Wisconsin is one of only 19 states that allows you to choose which set of exemptions you use. The experts at Burr Law can help you determine which is better for your particular situation. While Wisconsin does not have a specific federal tax refund exemption, you can protect it with a wildcard exemption. In any event, your tax refund can become an asset protected through your exemptions, and you would then retain it.

Refund Used For Necessary Expenses

If you spend your tax refund on necessary expenses like mortgage or rent payments, that is allowable. Other necessary expenses include food, medical expenses, and clothing. Basically, as long as you are not spending it on luxury items, it’s all right for you to spend the tax refund you receive. You can also use your tax refund to pay your bankruptcy attorney and associated court costs.

Timing – Refund From Income After Filing

Any refund that results from income you earned after filing for bankruptcy is yours free and clear. Also, if any portion of the refund results from income your earned after the filing date, that portion is available to you without restriction. Again, this is a delicate calculation and it is vital that you have an experienced bankruptcy attorney from Burr Law to guide you through the process. You want to adhere to the law in all instances.

The issue of tax returns during bankruptcy is complex. With the experts at Burr Law, you can feel confident that all of your individual circumstances will be carefully considered. We will find the best possible solutions for your financial situation.

Woman burdened with tax debt

Can You File Bankruptcy for Taxes in Wisconsin?

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Bankruptcy protection is a handy answer to many people’s money woes, but the law has its limits. If you’ve got tax debts that you’d like to resolve by filing for bankruptcy, you need to understand the essentials.

Bankruptcy Basics

Bankruptcy protects consumers by helping them resolve their debts and stopping harassment by collectors. It can also give debtors welcome breathing room before they attempt to make a rebound.

Tax Debt and the Automatic Stay

The automatic stay is a freebie of sorts — It provides temporary relief even if the court denies you bankruptcy protection. What’s more, it goes into effect the instant you file.

While active, the automatic stay bars creditors, such as the IRS, from trying to collect your debt balance. Creditors can ask the court to lift the stay so that they can keep coming after you. Although judges won’t remove your temporary protection without a good reason, you may be less likely to receive a stay after filing multiple times.

The End Goal

Automatic stays only last during your bankruptcy case. The real objective of filing is to convince the court that you’re worthy of more permanent protection.

Bankruptcy involves the legal discharge, or cancellation, of outstanding debts that you lack the means to pay. Different types of filings, such as the overwhelmingly common Chapters 7 and 13, have distinct rules for the kinds of debt they’re allowed to discharge.

What makes taxes bankruptcy eligible?

To be discharged, your tax debts must have already been three years old when you filed and pertain to business or compensation-related income. You also need to have filed an on-time tax return no less than two years before seeking bankruptcy.

By law, the IRS is required to assess, or record, all overdue tax liabilities. Your IRS assessment must have occurred at least 240 days before you seek bankruptcy.

Bear in mind that you’ll need to be on your best behavior during the case. For instance, skipping a return or missing your current-year tax deadline might result in your bankruptcy petition’s dismissal.

Using Bankruptcy for Taxes

Bankruptcy is an ideal fresh start for many Wisconsin taxpayers. Considering that American consumers struggle beneath about $4 trillion in debt, it’s not unreasonable to assume that someone with tax liabilities might also need relief elsewhere. Filing for Chapter 13 or Chapter 7 bankruptcy could be a viable answer.

Not every debt qualifies for bankruptcy. Depending on your tax circumstances, you might only receive partial relief. Considering a bankruptcy filing is still worth it, however, because it might be the one thing that turns your situation around. Learn whether it’s the right move for you by contacting the Burr Law Office team. Call 262-827-0375 for a FREE tax debt relief consultation today.

Filing for Bankruptcy? Here’s What to Know About Your Tax Debt

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Filing for bankruptcy won’t magically solve all of your money problems. What it can do, however, is reduce some of your hardships. When it comes to your overdue tax burdens, you may get some relief. Does bankruptcy clear tax debt? Here’s what to know about the complex rules and why you might need legal help.

Understanding Bankruptcy

Being bankrupt doesn’t just mean that you can’t pay your debts. It’s a specific type of legal status with roots in constitutional law, and you have to petition a court to leverage the benefits. As you might expect, this process includes a variety of rules.

A Good Example: Chapter 7

Imagine that you file for Chapter 7 bankruptcy in Wisconsin. This widely used form of protection lets you transfer your assets, or properties, over to a third party. The third party, or trustee, then sells them and uses the money to pay your creditors.

Chapter 7 and Taxes

Does bankruptcy clear tax debt? It all depends on your situation and ability to build a strong, evidence-backed case.

Chapter 7 only lets you eliminate tax debt under specific circumstances. For instance, you’ll still need to file your taxes during your bankruptcy case, and you need to have filed a previous return at least two years before seeking protection. You also can’t have previously taken unlawful actions, such as lying on a return or trying to hide non-exempt assets, to evade taxes or mislead the court.

The specifics of the tax debts that you want to discharge also matter. Chapter 7 only excuses income tax debt that’s at least three years old at the time of your filing. In addition, the IRS needs to have assessed the liability at least 240 days before your bankruptcy petition becomes formal.

If you owe money in penalties from missing a payment or took on more tax debt recently, then these liabilities won’t be excused. It’s also important to understand the case-by-case limitations of the rules: As various cases in the Eastern District of Wisconsin Bankruptcy Court have shown, things like tax refunds may not be protected from claims.

The Value of Filing for Bankruptcy

Why file for protection if you have to jump through so many hoops? When you work with a reputable attorney like Burr Law Office, there are many potential advantages.

Chapter 7 has the benefit of immediately stopping your collectors from pursuing repayment. This temporary relief, also known as an automatic stay, only lasts while your case is going through court, but it can be a huge perk if you’re struggling financially. What’s more, the stay goes into effect the instant you file even if you don’t eventually receive approval.

Chapter 7 filings can also be quick compared to alternatives, such as Chapter 11 and Chapter 13 bankruptcy. Although these options have their benefits, they require you to come up with a repayment plan, which can take time.

Filing for bankruptcy has the potential to relieve you from overbearing debt. Even if it doesn’t clear all of your tax debt, the mere act of giving you breathing room may make it easier to adapt and pay what you owe.

Want to learn more about the ins and outs of seeking bankruptcy protection in Milwaukee or Waukesha? Talk to a legal tax debt adviser at the Burr Law Office. Call (262) 827-0375 today.

Is Your Tax Return Taken in Bankruptcy?

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As we make our way into February, it’s time to start getting our finances in order to prepare for taxes. For those looking to file for bankruptcy in the Milwaukee and Waukesha area, the topic of tax returns often comes up. At Burr Law Office, we want to make sure you fully understand the process and feel confident in your case.

When looking to file a Chapter 7 bankruptcy, your tax return is an important consideration. People who will receive a return right before filing often wonder – will I be able to keep my return or will it be taken as part of the bankruptcy? The answer is dependent upon a number of factors (including the size of the return), but generally the person filing for bankruptcy will be able to keep the return. Under federal bankruptcy exemptions, you’re generally good to go – the exemptions are normally large enough to protect most tax refunds.

While being able to keep your return is great news, you should take precautions as to how you plan to use the money. It’s often recommended that people use their tax return money to pay for the costs and fees associated with bankruptcy. In essence, it’s best to use the money towards making the bankruptcy process easier as opposed to purchasing other things. One thing to note – you should consult your bankruptcy attorney if you plan to use the money to pay off debt you owe to a creditor or family member. Often the trustee has the ability to take the money back from whomever you paid.

If you’re unsure of your situation, the best idea is to call our bankruptcy attorney team at Burr Law Office. We’ll help make the bankruptcy process as smooth as possible for you.