What to know about taxes and Chapter 7 bankruptcy
When facing serious debt problems, it is a common instinct to avoid collections agents. This instinct is understandable. You are already facing enormous amount of stress with mounting bills and the inability to pay them off. Letters, phone calls and other communications from creditors only add to this stress.
However, when it comes to tax debt, it is important to deal with these issues appropriately, especially if you are considering filing for Chapter 7 bankruptcy. Some tax debts are eligible for bankruptcy discharge, but failure to deal appropriately with the IRS could jeopardize this opportunity.
If you are dealing with insurmountable debts and considering bankruptcy, the following information can help ensure that your tax debts remain eligible for tax discharge.
First, make sure you file your tax returns. Although it may be tempting to ignore this requirement, tax debts are only eligible for bankruptcy discharge if the person filing for debt relief has filed a valid return during the two years leading up to filing.
Avoid fraudulent tax returns. Tax evasion or tax fraud would render tax debts ineligible for bankruptcy discharge. Fraud can include intentionally including incorrect information on your returns, incomplete returns and intentionally hiding funds.
Prioritize your payments. If limited funds make it impossible to pay all of your debts, it becomes especially important to take a strategic approach regarding which payments you make and when you make them. This is true for tax debts as well, as not all types of tax debts are eligible for bankruptcy discharge.
Know your rights. There are many other factors involved with bankruptcy relief for tax debts, and it is easy to make simple errors that could render these debts ineligible for discharge, so it is important to gain a full understanding your rights and options. Do as much research as you can. It might also be wise to talk with a bankruptcy lawyer you trust to learn more about the rights and options available to you.
Source: FindLaw.com, “Bankruptcy and Taxes: Eliminating Tax Debts in Bankruptcy,” accessed November 21, 2014.