TAXES AND BANKRUPTCY
When money gets tight, clients often adjust their tax withholdings so they have more take-home pay to pay bills. Although this sounds good in the short term, it could have long-term consequences. In most cases, you are better off leaving your withholdings alone and dealing with your debts in a more effective way. Otherwise, you are really just trading one debt for another. And, in most cases, the debt you are trying to pay off does not get paid and now you owe the IRS because you under-withheld for your personal income taxes.
First, try to avoid getting into tax debt at all. But, if you do owe taxes for whatever reason, I’m often asked if tax debt can be included in a bankruptcy case. Let’s get the terminology clear so we are on the same page. Any debt can be included in a bankruptcy case. The real question is whether the debt can be discharged, or wiped out. Discharge means your legal obligation to repay the debt is wiped out and you don’t have to repay it – ever. That’s really what everyone wants a discharge of debt.
You can include all taxes in a bankruptcy case, but you may still owe some taxes after the case ends.
WHAT TAXES MAY BE DISCHARGED?
In certain circumstances, taxes you owe can be discharged in bankruptcy. If you owe taxes and need to file a bankruptcy case, speaking with a qualified bankruptcy lawyer can make all the difference as this is a really complicated (taxing?) subspecialty of bankruptcy law.
The general rule is that all taxes have to be paid. There are, however, exceptions to this rule. For example, taxes that are more than 3 years old may be discharged (if your tax return was timely filed). There are other qualifications, so it would be helpful to talk with an experienced bankruptcy attorney for guidance on whether your tax debt can be discharged. Most bankruptcy lawyers offer a free consultation, so take advantage of that and learn your rights.
Even if you owe taxes, you may be able to pay those taxes through a Chapter 13 consolidation – and keep the IRS off your back while you are repaying them.
WHAT IF THE IRS FILED A TAX LIEN?
You may be stuck paying the IRS if a tax lien has been filed against your property. However, as always, there are ways to deal with this, too. Under Chapter 13 bankruptcy law, you only have to repay up to what your property is worth. Let’s say you owe the IRS $20,000 for a tax debt. If your personal property is worth $5,000, then that’s all you have to repay (with a little interest). Your experienced attorney can walk you through this analysis and let you know what you can do.