Top 4 Tax Problems in Bankruptcy

Top 4 Tax Problems in Bankruptcy

The top 4 tax problems in bankruptcy are not particularly easy to avoid. For those facing money problems, taxes are often an afterthought. After all, paying taxes means less money in your paycheck. But the tax problems that most frequently occur in bankruptcy are actually violations of intuitive rules.Top 4 Tax Problems in Bankruptcy

Tax Problems in Bankruptcy: Chapter 7

Nondischargeability. Chapter 7 bankruptcy will not discharge recent taxes. Likewise, Chapter 7 does not discharge late-filed taxes. Only taxes over three years old with returns filed on time can be discharged in Chapter 7 bankruptcy. Older taxes may be discharged in bankruptcy. Otherwise, taxes pass through the bankruptcy discharge for many Chapter 7 filers.

Security Bifurcation. If the IRS has liened against your real property, then they may possess a bifurcated claim against you. In other words, part of your tax liability may be treated as priority; some treated as secured; and still another part may be considered unsecured nonpriority and therefore eligible for discharge. Assess your liability carefully. Do not expect either the state or federal taxing authorities to correct their own oversights or mistakes.

Tax Problems in Bankruptcy: Chapter 13 

Repayment in Full. Taxes are priority debts and therefore must be repaid in full during the course of the Chapter 13 plan. In some cases, that may simply reduce the payout to unsecured creditors. But in many other cases taxes may dramatically increase your monthly repayment amount. If you have assets to protect in a Chapter 13, your attorney should conduct a careful review of your total tax liability prior to filing your case.

Mandatory Filing Date. You must file your taxes on time to remain in a Chapter 13 bankruptcy. This year, that date is Tuesday, April 18, 2017. You may not file an extension to file your taxes in Chapter 13. You must file your taxes on or by Tax Day. In addition, you must also provide a copy of your federal and state tax returns to the Chapter 13 trustee. If you fail to do so, the trustee will file a motion to dismiss your case. Nobody enjoys filing taxes. But that will not suffice as an excuse to the court for not filing and submitting your returns.

Tax Problems in Bankruptcy

Tax problems frequently resolve themselves more easily once you are under bankruptcy protection. Take steps before you even file for bankruptcy. By filing your returns on time, many debtors are able to avoid the most common bankruptcy problems in bankruptcy. Sort out your tax situation with a qualified bankruptcy attorney.

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About Brian V. Lee 513 Articles
Brian V. Lee provides bankruptcy, foreclosure defense, business turnaround, and litigation services to clients in the District of Columbia, Virginia, and Maryland. Brian was the Washington, D.C. state chair of the National Association of Consumer Bankruptcy Attorneys from 2016 to 2018.