Tax Debt and Bankruptcy

Tax debt can be a crippling burden for individuals and businesses alike. When tax debt becomes too much to handle, bankruptcy may be the only viable option.

Bankruptcy is a legal process that can provide relief for people who are overwhelmed by debt. It can stop creditors from taking action against you and allow you to reorganize your finances. With the right guidance, bankruptcy can be an effective tool to help you move forward and eliminate the burden of debts even in some cases, tax debt.

When Can Taxes be Discharged in Bankruptcy?

Tax debt can be discharged in bankruptcy, but it depends on the type of tax and when the debt was incurred. Generally, income taxes that are at least three years old before filing for bankruptcy can be discharged in a Chapter 7 bankruptcy.

In Chapter 13 bankruptcies, federal tax liens may need to be paid back over a period of five years, depending on the amount owed and other factors. In either case, any outstanding federal or state tax lien must be paid in full before the debt is discharged in bankruptcy.

Additionally, if the IRS filed a tax lien against you before you filed for bankruptcy, then the lien will remain even after your other debts have been discharged.

To understand if bankruptcy can help you with your tax debt, please consult with attorney Kain or attorney Henehan. We specialize in bankruptcy law and are prepared to give you an honest evaluation.

What Happens to Tax Debt in Bankruptcy?

When you owe tax debt and file for bankruptcy, it is possible to discharge the debt when you file. Depending on the type of bankruptcy you are filing, either Chapter 7 or Chapter 13, the way in which your tax debt is resolved is different. With a Chapter 7 bankruptcy, you may be able to have the entire amount discharged. However, with a Chapter 13 bankruptcy, only some of your tax debt may be discharged, while some may need to be paid off over time.

The IRS has very specific rules that dictate how much of your tax debt can be discharged and how much must be repaid. Depending on individual circumstances, filing for bankruptcy could potentially help alleviate an overwhelming amount of debt, including tax debt. Make sure to consult with a qualified attorney before deciding if it’s right for you.

How Will an Automatic Stay Affect Tax Debt?

An automatic stay can have a significant impact on the tax debt. If you file for bankruptcy, the IRS will be notified and an immediate stop, or “stay”, will be put on any further collection activity from them. This includes federal tax liens, garnishments, or other collection measures that the IRS may have taken against you. This stay will remain in place until your debts are discharged in accordance with your type of bankruptcy. It is important to remember that regardless of your filing status, you must still pay your taxes or face possible penalties from the IRS.

Property Taxes and Bankruptcy

If you file for bankruptcy, your property taxes will not necessarily be forgiven. Depending on the type of bankruptcy you are filing and the state laws in which your property is located, you may still be required to pay property taxes even after filing for bankruptcy. If you file a Chapter 13 Bankruptcy, you may be able to restructure your debts so that they can be paid over a period of time. This could include repaying back property taxes and current property tax bills over a three to five-year period.

Schedule a Consultation With a Minnesota Bankruptcy Lawyer

When you’re facing overwhelming amounts of financial debt, bankruptcy may be the best option to handle this problem. Margaret Henehan and William Kain are experienced bankruptcy attorneys  serving Minnesota. We have offices in St. Cloud and the Twin Cities area. The right lawyer can help determine your eligibility and advise you on how to best handle the situation and we are prepared to help you find solutions. We want to make you comfortable from the first call. 

If you have been dealing with debt problems, let’s have a conversation and see if bankruptcy is an option. You can have a free 60 minute consultation virtually, by phone, and in person at one of our offices. Contact Kain + Henehan by calling (612) 438-8006 or filling out the online form. Schedule a free consultation to learn more about how Kain + Henehan can help you.