Filing Bankruptcy To Deal With A Tax Bill

How To Handle Your Tax Woes?

It must be remembered that more often than not by filing a bankruptcy, you may be able to erase tax debts. Or, if you can't eliminate your tax debt in bankruptcy, you may use bankruptcy to buy time and influence the IRS to accept a valid payment plan that can be better than the one enforced upon you by the IRS.

Different Types Of Bankruptcy Relief  

Bankruptcy is a legal process whereby one seeks help to sort his debt problems, by filing a petition in the bankruptcy court. Two types of bankruptcies are:

• Liquidation bankruptcy, where you appeal to the court to eliminate all your debts completely (Chapter 7 bankruptcy), and


• Reorganization bankruptcy, where you pay back your debts over a specific period, sometimes at a fraction on the dollar (Chapter 11, 12 or 13 bankruptcy).

What Is Automatic Stay?

Automatic stay is one of the bankruptcy's most attractive features. The very moment you file for bankruptcy, this feature of automatic stay prevents all your creditors from collecting their debts. Which in other words infer that the IRS cannot seize your assets or property right away.

The creditor or bill collector only by appealing to the bankruptcy judge to remove, or lift, the automatic stay can resume collection activities. If the action of the creditor has no impact on your bankruptcy, like an eviction, then the judges may consider lifting the stay.

Conditions Of Discharge Of Taxes In A Bankruptcy

According to the Chapter 7 of Bankruptcy Law, you may discharge debts for federal income only if all of these five conditions are fulfilled:

• That the taxes are income taxes. Taxes other than income, such as Payroll Taxes, Trust Fund Recovery Penalty or fraud penalties, can never be eliminated in bankruptcy.
 
• The tax return was originally due at least three years before you file for bankruptcy.
 
• That a fraudulent tax return was never filed by you or you never attempted to willfully evade paying taxes -- for example, by using a false Social Security number on your tax return.
 
• The IRS assessed the income tax debt at least 240 days before you file your bankruptcy petition, or has not yet been assessed.
 
• That you actually filed the tax return at least two years before filing the bankruptcy. If you do not agree and have not signed the substitute return then it does not matter if the IRS has filed a substitute return for you.

Effect Of Federal Tax Lien

Your victory may be incomplete in the proceedings if your taxes qualify for discharge in a Chapter 7 bankruptcy case. It is because your previous recorded tax liens are not affected by your filing. A Chapter 7 bankruptcy will wipe out only your personal obligation to pay the debt. Any lien recorded before you file for bankruptcy remains. After your bankruptcy, the IRS can seize any property you owned at the time the bankruptcy was filed.
After bankruptcy, the IRS would generally seize only real estate and retirement accounts or pensions. Even then, IRS seizures take place only when a taxpayer has made no efforts to otherwise resolve the problem. Moreover, IRS collectors must obtain approval from their supervisors before seizing a house or pension.
If Your Tax Debts Aren't Wiped Out or Paid Off in Bankruptcy
If you still owe the IRS when you come out from bankruptcy, the IRS gets extra time to collect the balance. You might still owe the IRS after your bankruptcy ends if: 

• A Chapter 7 bankruptcy eliminates only some of your tax debt, or
 
• You have not paid off all of your tax debt in a repayment bankruptcy.

The IRS normally takes 10 years to collect tax bills, penalties and interest from you. Once your bankruptcy case is over, the IRS gets whatever time remains on the original ten years, plus the time your bankruptcy case was pending (usually four to six months in a Chapter 7 bankruptcy; up to five years in a reorganization bankruptcy), plus an additional six months.

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