Tax Debt and Chapter 7

Tax debt, Tax liens, and Chapter 7 bankruptcy

In a chapter 7 filing, most of the debtor’s personal obligation to pay their debts will be discharged.  Several of the debts that are generally non-dischargeable are domestic support obligations, fines, restitution, student loans, and taxes.  Along with other aspects, the relief of tax debt using the bankruptcy code is a widely misunderstood process.  There is a misconception that most taxes can be eliminated in bankruptcy, which is often not the case.

Although it is a general rule taxes are considered non-dischargeable, certain taxes may be discharged if they meet all of the qualifying conditions:

A)  They are income taxes.  Taxes such as payroll or unemployment taxes will never be discharged;

B)  The taxes were filed timely and at least 2 years prior to the bankruptcy;

C)  The taxes were not filed with fraudulent intent or willful evasion.  For example, taxes with a fraudulent social security number or filed with information in a willful attempt to evade paying taxes are never dischargeable;

D)  The IRS tax assessment was at least 240 days prior to the bankruptcy filing; and

E)  There has been no offer in compromise related to the tax debt.

If the tax debt meets all the above criteria, it may qualify for discharge in a chapter 7.  However, if any of tax debt has an associated IRS tax lien, the lien could survive the bankruptcy.  In other words, your personal liability to pay the debt will be discharged but a lien against your property, including real estate, personal property, and financial assets, will protect the IRS’ interest in the amount owed.  With several exceptions, IRC section 6502(a) (1) establishes a statute of limitation collection period of 10 years on a tax lien.  The tax lien is only applicable to the assets you had at the time the lien was filed.

If a tax lien survives your dischargeable tax debt, there are still options.  Several of these options include an offer in compromise, discharge of the property which allows you to sell property free of the lien, lien subordination which doesn’t remove the lien but modifies its priority and can be useful in getting a loan or mortgage, or you can let the statute of limitation run if there is little to no equity, value, or IRS interest.

Have tax debt? We can help. Our free consultations allow you access to the best legal advice we can offer to help guide you to your best choice. We want you to make the most informed and educated decision on debt relief and feel confident in that decision, whether it is bankruptcy or an alternative to bankruptcy.  Contact us where an experienced bankruptcy lawyer can help start your way to a fresh start.

Call Attorney Kurt G. Larsen at 312-909-1128 or email us today.

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