Income tax debt can be very difficult to deal with, especially when the IRS is threatening collection actions such as wage garnishments and levies. The government can garnish your wages for income tax debt, which can make it very difficult to pay your other debts and living expenses. Our Jacksonville bankruptcy attorney assists clients in getting rid of tax debt through bankruptcy filings. If you need help with tax debt or other debts, call 904-248-4482 for a free consultation with a Jacksonville bankruptcy lawyer.
In this article, our attorney discusses:
- Are income taxes dischargeable in a bankruptcy case?
- What are the requirements for discharging old tax debt?
- Can a Chapter 13 bankruptcy case help with income tax debt?
Are income taxes dischargeable in a bankruptcy case?
When a debt is discharged in bankruptcy, the creditor cannot try to collect the debt because the debtor's legal liability for the debt is erased. In other words, you never need to worry about paying a creditor for a discharged debt.
Most unsecured debts are eligible for a discharge in bankruptcy. Examples of unsecured debts that are typically dischargeable in bankruptcy included credit cards, medical bills, old utility bills, and personal loans. However, secured debts and some unsecured debts are handled differently.
A secured creditor has collateral that secures the debt. A car loan is typically secured by a vehicle, and a mortgage loan is secured by real estate. Even though a bankruptcy case may discharge the underlying debt, it does not void the lien on the collateral. If you do not continue paying your loan payments, the creditor can pursue legal remedies to secure and sell the property to pay the loan.
Some unsecured debts are treated as priority debts. These debts are not dischargeable in a bankruptcy case. Examples of priority unsecured debts include income taxes, other debts owed to the government, alimony, child support, and restitution. Student loans are not priority debts, but student loans are not typically discharged through bankruptcy.
Even though income taxes are considered a priority unsecured debt that is not discharged, you might be able to get rid of income tax debt in some cases by filing a bankruptcy case.
What are the requirements for discharging old tax debt?
Income tax debt may be eligible for a discharge depending on the age of the debt. Some old tax debt may be discharged if it meets certain requirements. The requirements to discharge tax debt are usually referred to as the 3-2-240 Rule.
The tax debt must meet all three of the following requirements to qualify for a discharge:
- The income tax debt became due at least three years or more before you file a bankruptcy petition;
- The tax returns that established the tax liability was filed two years or more before you file a bankruptcy petition; and,
- The IRS assessed the income tax debt at least 240 days or more before you file a bankruptcy petition.
If the income tax debt meets all the above criteria, it may be treated as a general unsecured debt. As a general unsecured debt, the income tax debt may be discharged through your Chapter 7 bankruptcy case.
Calculating the dates for the requirements can be tricky. Late-filed tax returns and extensions to file tax returns can impact the date. The IRS may not assess the tax debt on the date the return was filed, as in the case of a tax audit. A Jacksonville bankruptcy attorney can review the tax debt and calculate the correct dates to determine if the income tax debt is eligible for a discharge.
Can a Chapter 13 bankruptcy case help with income tax debt?
Old income tax debt that meets the above requirements can also be discharged in a Chapter 13 case. As a general unsecured creditor, the IRS receives the same percentage as other unsecured creditors.
However, if the tax debt does not meet all three of the above requirements, the debt is treated as a priority unsecured debt. Priority debts must be paid in full through the Chapter 13 bankruptcy plan.
Even though you are required to pay the income tax debt in full, the debt can be spread out over 60 months so that you can afford the payments. Because you include your other debts in the bankruptcy plan, you get rid of your other debts at the same time you resolve your problem with tax debt.
Contact a Jacksonville Bankruptcy Attorney to Discuss Debt Relief Options
Bankruptcy has numerous benefits and advantages. You can take back control of your finances, get rid of debts you cannot pay, and protect your property from creditors. Before deciding on options with the government to repay debt, you should discuss your bankruptcy options with a bankruptcy lawyer in Jacksonville.
To learn more about getting out of debt through bankruptcy, call The Law Offices of Justin McMurray, P.A. at 904-248-4482 or use our contact form to schedule a free consultation with our Jacksonville bankruptcy lawyer.