Struggling with tax debt? Bankruptcy can help.
It’s not uncommon to see bankruptcy self-help websites state that taxes aren’t discharged in bankruptcy, but this is simply not the case. The truth is that only some types of taxes aren’t discharged in bankruptcy, while the rest are:
- “Trust Fund” taxes – these are payroll taxes that an employer is responsible for withholding for their employees’ tax obligations. It applies to the employer, not the employee. Even if the business is a corporation or an LLC, the officers of the company can be held personally liable for these taxes if they file personal bankruptcy. These types of taxes are not as common in bankruptcy because it only applies to business owners, but these taxes are never discharged in bankruptcy.
- State sales taxes – like trust fund taxes, if an employer does not withhold sales taxes owed to the North Carolina Department of Revenue, these are also not discharged in bankruptcy.
- Property taxes owed prior to filing, in most circumstances, less than one year old.
- Taxes that are owed for years that you did not file a return a return.
- Recent income taxes – these taxes will not be dischargeable if it has been been less than three years since they were first due. For example, if you owed taxes for the 2015 tax year, filed your return by the April 18, 2016, deadline, you would need to wait to file bankruptcy until after April 18, 2019, to file to discharge these taxes as general unsecured debts. If you file for an extension, the “first due” date will be extended for six more months.
- Late filed returns – these taxes are not dischargeable for two years since the return was filed. If you waited until December 31, 2017, to file your 2015 taxes, you would need to wait to file bankruptcy until January 1, 2020, in order to discharge these taxes.
- Recently assessed taxes – if you filed your returns, but the IRS or other taxing authority recently assessed taxes, these taxes will not be dischargeable for 240 days. So, if you filed your 2015 taxes on December 31, 2017, but the IRS assessed taxes on December 31, 2019, you would need to wait eight more months to file bankruptcy.
When making the decision to file bankruptcy, it is important to know what will and will not be discharged. This will determine whether the filing of your bankruptcy should be delayed so that you can discharge as much tax debt as possible. You will want to pull your account transcripts from the IRS so your bankruptcy attorney can determine your best options.
If you file a Chapter 7 bankruptcy, your non-dischargeable debts, including penalties, will survive the bankruptcy. If there was a tax lien before you filed Chapter 7, the lien would still remain on your property even if the underlying tax debt is discharged. Also, the IRS other taxing authorities can still file tax liens or garnish your wages after your bankruptcy is over. It may be beneficial to pursue an installment agreement or an offer in compromise to avoid these consequences.
On the other hand, Chapter 13 bankruptcy allows you to deal with your non-dischargeable taxes with the protection of the automatic stay – no more tax liens or wage garnishments once your case is filed. You will be required to pay back 100% of the non-dischargeable portion as priority taxes, but the remaining taxes are paid the same percentage as your other general unsecured creditors, like credit cards or medical bills. Another benefit of Chapter 13 bankruptcy is that tax penalties are paid at the lower unsecured rate as well. Tax liens can also be reduced, depending on the value of your assets and the equity you have. This can mean that even with the additional expense of Chapter 13, it can save you thousands of dollars versus filing Chapter 7 and paying the taxes through an installment plan.
Ready to see how bankruptcy can help you with your tax debts? Call and speak to an Asheville bankruptcy attorney today at 828-412-8700.