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Tax Blog

Bankruptcy and Taxes

Every year thousands of Americans suffer and file for bankruptcy. Bankruptcy is largely seen as a plausible and efficient (especially in Chapter 7) method of resolving debt and having a fresh start. But how does bankruptcy coincide with taxes? Do owed taxes go away? Let’s take a look.

First, let’s look at the two types of bankruptcy for individuals, chapter 7 and chapter 13. Chapter 7 is a liquidation of your debts and provides a fresh start for the debtor. A chapter 13 is applied toward individuals who wish to keep their assets, this creates the repayment plan. The repayment plan can be 3 to 5 years in length and repays all of the debts. So, in the case of owed taxes, if you file a chapter 13, you will simply make monthly payments until the debt is paid. What about wiping out the debt under Chapter 7?

You can discharge federal income taxes under Chapter 7 only if all of the following are true:

  • The taxes are solely income taxes

  • You did not commit fraud or willful evasion

  • The debt is at minimum 3 years old

  • The debtor filed a tax return

  • You must pass the 240-day rule

  • Income tax must have been assessed by the IRS at least 240 days before you file your bankruptcy petition

Taxes are never fun and neither is bankruptcy, but they are two parts of American society that are fairly common. Having professionals on your side is important, if you have questions regarding taxes contact the Professionals at the Center for Financial, Legal & Tax Planning, Inc.

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