The Basics of Discharging Tax Debt in Chapter 7 Bankruptcy


The Basics of Discharging Tax Debt in Chapter 7 Bankruptcy

Although many people are unaware, discharging certain tax debts in Chapter 7 bankruptcy is possible under certain circumstances. Tax debts can be among the scariest types of debt to carry around, and so this should come as welcome news to readers. However, not all types of tax debt can be discharged in Chapter 7 bankruptcy, only specific types of tax debt; furthermore, the rules regarding discharging tax debts are complex, and so those seeking this type of debt relief should consult with an attorney prior to filing. In this post, we will go over the details on discharging tax debts in bankruptcy, and also provide more information on the tax debts which are ineligible for discharge.

Rules on Discharging Tax Debts in Chapter 7 Bankruptcy

As mentioned, discharging certain tax debts is possible, but there are rules which must be observed. The first rule is that only income-based taxes can be discharged; these income-based taxes can derive from either a federal or state tax return, but they must be income-based. In addition, there are time-related restrictions: the tax return from which the underlying debt derives must have been due at least 3 years prior to the filing date. Basically, this ensures that the tax debt is sufficiently old. Moreover, the return from which the debt derives must have been filed at least 2 years before the filing date; hence, the filer can potentially discharge tax debts even if the return is filed late.

Furthermore, the next rule is that the taxes themselves must have been assessed at least 240 days prior to filing. This rule was implemented with the understanding that certain people will seek a discharge after an offer-in-compromise (OIC). Lastly, to discharge income-based tax debts in Chapter 7 bankruptcy, the filer cannot perpetrate any form of fraud or tax evasion. If, for instance, the tax return from which the tax debt originates is found to be fraudulent, then the tax debt becomes nondischargeable.

Rules on Nondischargeable Tax Debts

As a general rule, tax debts which are not income-based are nondischargeable. Let’s look at a few specific examples of nondischargeable tax debt.

Property taxes are ordinarily nondischargeable, however this only applies to property taxes payable within 1 year of the bankruptcy filing. This means, potentially, that older property tax debts may be discharged under Chapter 7. But, readers should be advised that property tax debts are often secured with a lien; this means, as we will explore further, that you could end up paying back property taxes even after you discharge your personal liability in bankruptcy.

Importantly, Chapter 7 doesn’t remove or eliminate tax liens. A tax lien is a type of secured interest which is created when a taxing authority places a lien on a debtor’s property. The lien ensures that the taxing entity will receive its balance owed whenever the property is liquidated. If a tax lien exists prior to filing, it can remain even after discharging the underlying tax debts. What this means is that a person can be relieved of personal liability for a given tax debt, but then still have a lien on his or her property. This means that the taxing entity will ultimately receive its balance if or when the property is sold. This is true even though the person no longer has personal liability!

In addition to property taxes, certain employment taxes, excise taxes, duties, and non-punitive tax penalties may not be discharged.

Contact Financial Freedom Advocates Today for More Information

If you’d like to know more, reach out to one of the attorneys at Financial Freedom Advocates today by calling 786-668-6688.

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