Understanding Bankruptcy and Tax Debt: A Comprehensive Guide

Eliminate Tax Debt Through Bankruptcy

Questions regarding whether tax debt can be eliminated through bankruptcy are very common. The short answer is that while some taxes cannot be eliminated through bankruptcy, others can. The highly knowledgeable bankruptcy attorneys at Simon Fitzgerald will take a comprehensive look at your tax debt to determine whether or not it can be eliminated. While filing for Chapter 7 bankruptcy is not easy, it can be worth it to have some or all of your tax debt eliminated through bankruptcy. Generally speaking, tax debt and bankruptcy are only compatible when:

  • Your tax debt is either for federal or state income tax (Chapter 7 bankruptcy cannot eliminate payroll taxes or tax penalties related to fraud)
  • There was no willful evasion on your part regarding your taxes, and you did not file a fraudulent tax return—Chapter 7 bankruptcy is only an option when all your actions associated with your taxes were lawful. 
  • Any federal or state income tax debt must be at least three years old.
  • You have consistently filed tax returns and filed one at least two years before filing for bankruptcy—in other words, if you have federal or state income tax debt that you owe, there must be a corresponding tax return for that debt.
  • Either your tax debt has not yet been assessed, or it was assessed at least 240 days before you filed for bankruptcy. 
  • The so-called “240-day rule” can be extended if the IRS suspends collection efforts as a result of a compromise or prior filing.

It is essential that you fully understand your rights and responsibilities when dealing with tax debt and bankruptcy. Having a highly skilled bankruptcy attorney from Simon Fitzgerald by your side will ensure you are fully cognizant of all your options and your rights against creditors. 

Can Bankruptcy Help with Tax Debt?

Bankruptcy can be a powerful tool when dealing with tax debt. While it’s a common misconception that tax debts cannot be discharged in bankruptcy, the truth is more nuanced. Certain back taxes may be eliminated in bankruptcy, providing significant relief for those struggling with debt. 

When you file for bankruptcy, an automatic stay is put in place. This halts all collection efforts, including those from the IRS or Louisiana Department of Revenue. This means you can have peace of mind knowing that your wages won’t be garnished and your assets won’t be seized to pay off tax debt.

Louisiana bankruptcy laws can be found in the 2022 Revised Statutes, Title 39-Public Finance Section 39:99.10, Bankruptcy. Remember, you cannot eliminate tax debts through Chapter 7 bankruptcy unless your tax debt is more than two years old, you were honest when filing your taxes, and, there is no current tax lien on your property. You must have filed a tax return for any taxes you hope to discharge and a late filing beyond the allowed extensions could potentially disqualify your debt as dischargeable under Chapter 7 bankruptcy.  

A federal tax lien can be discharged from the person, but not from the property. This means that when you file Chapter 7 bankruptcy, the IRS cannot pursue you for additional amounts beyond the value of the property. Even if your tax debts qualify under Chapter 7 laws and are considered dischargeable, a tax lien that is already in place will not go away. 

So, while you may be able to keep your home and continue living in it during and after Chapter 7 bankruptcy, you must pay off the tax lien before selling the property. The only possible exceptions to this are if your tax lien is more than ten years old, or there was an error when the tax lien was filed. Even if either of these things is true, this does not guarantee your attorney can have the tax lien removed during your Chapter 7 bankruptcy filing. 

Chapter 7 bankruptcy requires that you provide your current income tax return along with any returns filed while you are in the process of Chapter 7. But what if you are due a tax refund and how will a Chapter 7 bankruptcy filing affect future tax filings? Generally speaking, a tax refund due in the year you file Chapter 7 will become an asset and will be used by your trustee to pay off your creditors. That being said, your tax debt and a bankruptcy attorney can potentially use exemptions and timing to preserve some of your tax refunds.  

You must consult a knowledgeable tax debt and bankruptcy attorney from Simon Fitzgerald to determine whether your tax debt is dischargeable through Chapter 7 or Chapter 13.

However, not all tax debts can be discharged in bankruptcy. The specifics of your tax debt, your overall financial situation, and the type of bankruptcy you file will all play a role in determining what happens to your tax debt after bankruptcy.

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Chapter 13 Bankruptcy and Tax Debt

Chapter 13 bankruptcy, often referred to as a “wage earner’s plan,” allows individuals with regular income to develop a plan to repay all or part of their debts. Under this type of bankruptcy, debtors propose a repayment plan to make installments to creditors over three to five years.

If your tax debt cannot be discharged outright, Chapter 13 bankruptcy allows you to pay past-due taxes without interest. This can be a lifeline for those with significant tax debt, as it allows you to manage your debt in a way that fits your budget.

In other words, while there may be some allowances made for your tax debt during a Chapter 13 bankruptcy filing, you must discuss the matter with a knowledgeable Louisiana bankruptcy attorney who can determine whether these allowances fit your circumstances. Any tax debt that is older than three years may be forgiven, depending on your disposable income amount, however, that is not a given. 

If your tax debt can be discharged, no additional interest or penalties will accrue. If you have an IRS tax lien, you can add this lien to your Chapter 13 repayment plan. As long as you are honest about your income, and are meeting current tax obligations, the IRS must abide by your Chapter 13 repayment plan. Chapter 13 bankruptcy requires that you provide your past four years of tax returns, rather than the past two years that Chapter 7 bankruptcy requires. 

You must be up-to-date on your tax filings at the time you file for Chapter 13 bankruptcy. The worst case scenario is that your Chapter 13 bankruptcy filing can be dismissed if you miss the tax filing deadline after your trustee has filed a motion to give you time to pay. You may potentially be able to have the IRS supply an “estimate of income” so you can file for Chapter 13 even if you have not filed your tax return promptly. Unfortunately, the IRS is likely to overestimate your income and taxes owed, so it’s just better all the way around to have all necessary tax returns filed before starting the Chapter 13 process.  

Tax Liens vs. Tax Debt

Tax liens were briefly touched upon above as they apply to Chapter 7 and Chapter 13. You must understand the difference between tax debt and tax liens before filing for bankruptcy. Your tax debt is money you owe the state of Louisiana or the IRS for income tax. A tax lien is a legal judgment that attaches your property to satisfy a tax debt you have not paid. 

Tax liens are most often filed against your home so if you decide to sell your home, the tax lien must be satisfied before you receive any proceeds from the sale. A tax lien is rarely eliminated during a Chapter 7 bankruptcy. Your obligation to pay the debt is discharged and the IRS can no longer go after your income or bank account for a tax lien, but the lien remains attached to your property. 

Meet Brenda and Mark: A Chapter 13 Bankruptcy Case Illustration for Dealing with Income Tax Debt in Monroe

Brenda and Mark, a married couple from Monroe, grappled with a substantial income tax debt. A series of unfortunate events, including a failed business venture and unexpected medical bills, led to a backlog of unpaid taxes. The constant pressure from the IRS and the Louisiana Department of Revenue seemed insurmountable.

Desperate for a solution and fearing the consequences of wage garnishment and asset seizure, Brenda and Mark sought the expertise of Simon Fitzgerald LLC. Our seasoned bankruptcy attorneys evaluated their unique situation and identified Chapter 13 bankruptcy as the optimal solution.

With the filing of Chapter 13 bankruptcy, Brenda and Mark immediately experienced relief as the automatic stay halted all collection efforts from tax authorities. This legal protection allowed them to regroup and plan their next steps without the looming threat of aggressive collections.

Guided by our knowledgeable attorneys, Brenda and Mark crafted a realistic repayment plan that allowed them to pay off their overdue taxes over five years without accruing additional interest. This structured approach offered a clear and manageable path to financial recovery, ensuring they could fulfill their tax obligations without sacrificing essential living expenses.

Throughout their journey, the team at Simon Fitzgerald LLC stood by Brenda and Mark, offering compassionate support, clear guidance, and expert legal counsel. We empowered them to understand their rights, explore their options, and leverage the benefits of Chapter 13 bankruptcy to regain control of their financial lives.

Today, Brenda and Mark are well on their way to financial stability, unburdened by the crushing weight of tax debt. Their successful navigation of Chapter 13 bankruptcy illustrates the transformative power of informed legal guidance and the potential for relief that bankruptcy offers.

Understanding Your Rights

Understanding your rights when dealing with tax debt and considering bankruptcy is crucial. Louisiana law severely restricts “self-help” repossession, and creditors must adhere to strict guidelines when collecting a debt. 

It’s essential to consult with an experienced bankruptcy attorney if you’re dealing with tax debt. They can help you understand your options and rights against creditors. For more information, visit the IRS page on declaring bankruptcy.

Frequently Asked Questions

Dealing with income tax debt in a Chapter 13 bankruptcy can be intricate, and it’s normal to have questions about the process. We’ve compiled some of the most frequently asked questions about handling income tax debt in Chapter 13 to help you better understand what to expect.

How to Choose the Best LA Bankruptcy Lawyer for Me

Your choice of a Louisiana bankruptcy attorney can make a significant difference in the outcome of your bankruptcy filing. Not all bankruptcy attorneys are the same, by any means. You need a bankruptcy lawyer who has the qualifications and experience to know and understand every aspect and nuance of bankruptcy filing. This means you will receive every benefit possible when filing a Chapter 7 or Chapter 13 bankruptcy. 

When you choose Simon Fitzgerald, you are choosing Louisiana’s oldest bankruptcy law firm. Our firm has been involved in the practice of bankruptcy law for more than five decades, and the original Simon Fitzgerald law firm goes back to 1907.  We have helped more than 25,000 Louisiana residents through the bankruptcy process with the best outcome possible for their circumstances. 

Our experience and commitment to transparency simply make us your best choice during this difficult time. We invest more attorney hours in each case than the majority of our competitors, offering in-person, phone, and virtual consultations. We take pride in the fact that our knowledgeable attorneys come up with solutions that help our clients in the long run, and immediately. The Simon Fitzgerald attorneys will work hard to help you not miss time from work or be forced to travel significant distances to see your attorney. 

As we consistently provide simple solutions to complex problems, we work hard to make the bankruptcy process as painless as possible. Not only do we break down complex legal concepts into easy-to-understand terms, but we are committed to helping people from all walks of life—very simply, those in need. We want you to get a fresh start, keep everything possible, and accomplish this as inexpensively as possible.  At Simon Fitzgerald, we do a better job of representing our clients—and isn’t that what you want and need?

Why Choose Simon Fitzgerald LLC for a Fresh Financial Start?

Dealing with tax debt can be overwhelming, but you don’t have to face it alone. At Simon Fitzgerald LLC, we’ve established a legacy of helping clients achieve a fresh financial start. Our experienced attorneys can determine if your tax debts are dischargeable in bankruptcy and help you defer those tax obligations to get the IRS or Louisiana Department of Revenue off your back. 

With our legacy guiding us, we’re dedicated to providing clear, straightforward advice and guidance. Everyone deserves a fresh financial start; we’re here to help you achieve that. Choose us to navigate your financial issues and experience the difference our legacy can make. Ready to take the first step towards a fresh financial start? Confused about which debts can be wiped out in bankruptcy? Our free guide can help. Stay informed by signing up for our newsletter. When you’re ready to start your journey, submit your details and let our experienced team guide you. Schedule your free consultation today!