Tax Debt – Filing for Bankruptcy in 2021

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?

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?

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.

Is Your Tax Return Taken in Bankruptcy?

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.

Woman burdened with tax debt

Can You File Bankruptcy for Taxes in Wisconsin?

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

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.

Bankruptcy Legal Aid: Discharging Tax Debt with Chapter 7

In bankruptcy law, Chapter 7 is often referred to as a “liquidation bankruptcy” because it allows consumers to liquidate, or eliminate, almost all outstanding debts. Many people falsely believe that tax debt cannot be discharged when you file, but experienced Milwaukee bankruptcy legal aid from Attorney Burr can actually help most consumers eliminate tax debt by filing for Chapter 7 if they meet these three basic provisions.

The income tax return was due over three years ago

If you owe back taxes to the IRS, you are not alone—thousands of Americans either intentionally or inadvertently short the IRS a total of $290 billion each year. As the IRS becomes increasingly aggressive about pursuing people who owe back taxes, many consumers find themselves overwhelmed by bills. If you are considering filing for Chapter 7, you may be able to eliminate your tax debt as long as the tax return was due more than three years ago.

The income tax return was filed more than two years ago

Was your tax return filed more than two years ago today? If so, you already satisfy this requirement, but some taxpayers never file returns for certain years. In that case, the IRS will file one for you. Unfortunately, a government-filed tax return does not meet this test; each consumer must file his own return at least two years before filing for Chapter 7.

The tax was assessed more than 240 days ago

This rule means that the tax agency must have determined that you owe back taxes more than 240 days ago. If you filed your return and acknowledged that you owed a balance; according to bankruptcy law, your tax debt has been assessed. This rule can be confusing, so be sure to consult an experienced attorney to determine your precise assessment date.

Contact attorney Michael Burr at Burr Law Office today at (877) 891-1638 to get the Milwaukee bankruptcy legal aid you need.  You can also visit our website for more information about our legal services.

Tax Returns and Bankruptcy

Milwaukee bankruptcy tax refundWith tax season among us, the question of bankruptcy before or after taxes comes up quite often. Many people wonder whether or not their tax refund will affect their filing and, mostly, whether or not they will get to keep their refund.

There are a few factors that influence whether or not you will be able to keep your refund in a Chapter 7 bankruptcy filing – your exemptions, the time you file, and the amount of your refund.

As soon as you file for Chapter 7, essentially all of your assets become property of the bankruptcy – including any tax refunds as of your filing date. In other words, unless your Chapter 7 specifically exempts tax refunds, a trustee can take it and distribute it to creditors.

In order to protect your refund, you’ll have to be able to exempt it. The best way to find out if this is possible is by speaking with a Milwaukee bankruptcy lawyer like Michael Burr of Burr Law Offices prior to filing. By working with Attorney Burr, you will likely be able to be better protected in your case.

If you aren’t able to exempt your refund, the next step would be to look at the timing of your filing. This option will only be viable for those that aren’t rushed and have more flexibility for filing. You simply can wait until after you receive your refund and spend it. Do remember, however, purchasing an asset will still put you at risk for surrendering said purchase after filing. The best way to spend your refund is on living expenses – food, gas, rent, etc.

If you’re considering filing for Chapter 7 bankruptcy, or are having problems paying taxes, contact Milwaukee bankruptcy lawyer Michael Burr. With over 20 years of bankruptcy experience, Attorney Burr will help you have the most successful bankruptcy possible.