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Can bankruptcy be used to get rid of tax debt?

On Behalf of | Dec 2, 2014 | Tax Controversies

For many people, the end of the year brings many other emotions besides seasonal joy. The waning sunlight can also bring into focus financial problems that have been shadowing you for a long time.

If you are in this position, is filing for bankruptcy a sensible step toward a brighter future? In this post, we discuss one aspect of that decision: the effect of bankruptcy on personal tax debt.

Fortunately, it may be possible to discharge some or even all of your federal tax debt in a Chapter 7 bankruptcy. And even if you are not eligible for Chapter 7, you may be able to use Chapter 13 bankruptcy to stop tax penalties and interest from piling up.

Keep in mind that we are talking here about personal income taxes, not business taxes. If you are a business owner and have unpaid payroll taxes, your business cannot get out from under those taxes by filing bankruptcy.

But for you as an individual, a bankruptcy filing may be an effective way to reduce or eliminate tax debt. Of course, a lot depends on your specific circumstances. That is why it makes sense to discuss your case with an experienced tax attorney.

In particular, it will be important to determine whether you are eligible to file for a Chapter 7 bankruptcy. Unlike Chapter 13 – the other main form of consumer bankruptcy – Chapter 7 allows for the actual discharge of personal tax debt. But there is a means test for Chapter 7. If your income exceeds a designated amount, you may not be allowed to file for that type of bankruptcy.

If that is the case, you may still want to consider filing for Chapter 13 bankruptcy. Chapter 13 involves the creation of a debt repayment plan and is more common than Chapter 7. Chapter 13 can be used in appropriate cases to keep tax penalties and associated interest from continuing to accrue.

To be sure, stopping the penalties from increasing does not immediately address the principal of your tax debt. But it can make it m ore manageable to do so, given that the penalties and interest will not keep adding to it.

Please visit our page on using bankruptcy to reduce or eliminate taxes for more information about this process.


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