Bankruptcy and Tax Debt LifeBack Tax

Bankruptcy and Tax Debt - LifeBack Tax

Individuals or businesses who owe income taxes to the government may be able to resolve their tax debts when filing for bankruptcy. While most government-related debts tend to be nondischargable under bankruptcy laws, special circumstances may allow back income taxes to be wiped out along with other liabilities during a bankruptcy proceeding. Both federal and state income tax debts may be delayed or potentially discharged during bankruptcy.

In order for income tax to be eliminated in bankruptcy, the tax debt must have been for a tax return that was due at least 3 years ago, its respective tax return must have been filed at least 2 years ago, and their tax liability was assessed at least 240 days before filing for bankruptcy. Tax debt cannot be discharged if the taxpayer never file a tax return themselves, even if the government filed a substitute return. This criteria ensures that the government has an adequate opportunity to collect the taxpayer's debt prior to bankruptcy. Tax debt also cannot be discharged if the taxpayer was found guilty of tax fraud.

Only income tax debt may be cleared through bankruptcy; other tax debts, such as payroll or sales and use tax, cannot be discharged in bankruptcy. Additionally, if the government filed a tax lien to secure the tax debt, the lien may affect whether the tax debt is discharged, depending on the type of bankruptcy.

During bankruptcy, an "automatic stay" is placed on the filing party's creditors, including federal and state governments, preventing them from attempting to collect from the debtor. This stops the IRS or state tax authorities from taking actions such as sending collection notices, filing a tax lien, or levying assets, income, and bank accounts until the bankruptcy is closed. The "automatic stay" rule can provide taxpayers with a small amount of leeway to reorganize their finances for the duration of their bankruptcy case.

Chapter 13 bankruptcy, or a wage earner's plan, allows individual debtors to pay their debts over time while retaining their property. In Chapter 13 bankruptcy, the debtor agrees to partially or fully pay some of their debts, based on their income and whether the debt has legal priority or is a secured claim. These debts are consolidated under a three-to-five year repayment plan managed by a bankruptcy trustee, who distributes payments to the creditors. At the end this payment plan, any remaining unsecured nonpriority debts are discharged. Note that applying for Chapter 13 bankruptcy requires that the individual has filed their tax returns for the past four years

Priority debts, such as taxes owed within the last three years or assessed less than 240 days ago, are granted legal priority and are paid first in a repayment plan. Secure debts, such as tax liens, are limited to the value of the collateral (in the case of a federal tax lien, all of the taxpayer's property), and the remainder of the tax lien is considered unsecured. Recent tax debts, non-income tax debts, and tax liens must be paid in full, and cannot be discharged in Chapter 13 bankruptcy.

Only individual taxpayers (including sole proprietors) may file for Chapter 13 bankruptcy. Partnerships and corporations may instead file for Chapter 11 bankruptcy, or reorganization bankruptcy. Similarly to Chapter 13 bankruptcy, Chapter 11 bankruptcy establishes a repayment plan that allows a business to continue operating while paying its creditors. Individuals may also file under Chapter 11 if they are ineligible for Chapter 13 bankruptcy.

Chapter 7 bankruptcy, or liquidation bankruptcy, is the most common form of bankruptcy. Unlike Chapter 13 bankruptcy, it does not involve a repayment plan. During liquidation, a bankruptcy trustee sells off the debtor's equitable assets, excluding exemptions as defined under state laws. These exemptions are intended to leave the debtor with enough assets to make a living. After selling the debtor's assets, the trustee distributes the proceeds to the creditors, first paying priority debts and secured debts. Afterwards, any remaining dischargable debts are discharged.

When tax debt is discharged in Chapter 7 bankruptcy, the taxpayer is cleared of personal liability, and is no longer obligated to pay their past due taxes. This prevents the government from enforcing collection by taking the taxpayer to court, claiming after-acquired assets, or levying income and bank accounts. However, discharging a tax debt does not remove an associated tax lien that was before the taxpayer petitioned for bankruptcy. A tax lien stays on any assets that it was already attached to, and the taxpayer must pay the lien if they intend to sell those assets. On the other hand, if these assets were not sold during liquidation, they may not be equitable enough for the government to try seizing them.

Chapter 13 bankruptcy is included on credit reports for up to 7 years, while Chapter 7 bankruptcy is included on credit reports for up to 10 years. Due to the impacts on your credit score, bankruptcy may be less preferrable as a tax debt strategy compared to other options, such as entering an installment agreement, applying for an offer in compromise, or requesting uncollectible status. We at LifeBack Tax will be happy to assess your situation, and determine if bankruptcy is the best solution for resolving your tax debts.

Fast and Easy 4 Step Tax Relief

Step 1

Tax Investigation determin your tax liability

Step 2

Retrieve all documentation from the IRS

Step 3

Calaculate tax liability and current ability to pay

Final Step - Execute offer in compromise get your Life Back

IRS Tax Resolution - Get your Life Back

The fast path to tax resolution can be yours and you can get back to your life. We have a 4 step process that's easy for you. Don't worry about the State or IRS we take care of everything for you. We collect your data, contact the tax agency for you. We handle all negotiations to the tax debt entity so you don't have too. Within 24 hours we stop the wage garnishment or levies so you can focus back on your life.

Get your life back today, move on, go out have some fun let us handle all your worries with your tax debt. Our trained professionals will get that tax settlement for you and you'll be happier for it. At LifeBack Tax our job is your complete satisfaction.

Start Now Settle Now

Why put off what you can do today. Some customers have been putting their tax debt off for years. There is no reason, you have rights. We understand that a bank levy, or wage garnishment can have a severe impact on your life. It can be quite devastating trying to pay all your bills and feed your family while you are being levied or garnished. LifeBack Tax stops all that within 24 hours. Get the IRS off your back today, you have rights and we will represent them and make this as fast and painless as possible for you.

What are you waiting for this is your one opportunity to act now and take your life back. Let the experts at LifeBack work for you and settle this for you once and for all.

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Certified by The American Society of Tax Problem Solvers
Certified by The American Society of Tax Problem Solvers

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Member of California Society of Certified Public Accountants

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