What You Should Know about Bankruptcy and Tax

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Here’s a relatively little known fact – you can completely cancel your tax debts by being declared a bankrupt.  Of course, there are certain conditions that you must fulfill.  But if you meet the basic criteria, you can wave goodbye to your tax debts.  On the other hand, there are several implications about being declared a bankrupt, so be sure you talk to a lawyer to evaluate your debt removal options first before going ahead to apply for either Chapter 7 or Chapter 13 bankruptcy.  Bankruptcy is not a convenient way to escape paying your tax dues, it is a provision for those who genuinely cannot afford to pay to be relieved of their tax debts.  Click here to read or watch more IRS Help resources.

There are 2 provisions of the Bankruptcy Code under which you can apply for bankruptcy.  They are Chapter 7 and Chapter 13.  In general, Chapter 7 bankruptcy means that you will have your entire tax debt forgiven.  On the other hand, under Chapter 13 you may have some of your debt cancelled and the remainder will be paid off via installment payments.  Most individuals choose Chapter 7 over Chapter 13, but if you have a lot in the way of assets or your own business, Chapter 13 may be a better answer for your particular situation.  There is much to consider when it comes to bankruptcy, taxes and your own personal financial situation, so you need to have a good understanding of all this before deciding whether to go ahead with your bankruptcy application.

There are 5 conditions you must fulfill in order to make a successful application for bankruptcy.  Firstly, the debt must be more than 3 years old in that the due date for filing your taxes must be more than 3 years ago.  This prevents people from declaring bankruptcy year after year so they don’t have to pay taxes. This time frame also gives both you and the IRS plenty of time to figure out other methods of payment short of declaring bankruptcy.   Secondly, the tax return itself needs to be filed at least two years ago.  Likewise, the third condition states that the assessment for your tax must be at least 240 days ago.  These conditions are imposed to allow the IRS to have as much time as possible to collect the taxes from you.  Bankruptcy should be a last resort.

Under the fourth condition, you must not fraudulently apply for bankruptcy otherwise you will not be given any bankruptcy protection.  The final condition states that you must not be guilty of tax evasion at any point during your life.  These rules about bankruptcy and taxes are vitally important if you wish to file for bankruptcy to remove your tax debt.

 

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