Does Bankruptcy Clear IRS Debt? Understanding Your Options

Dealing with IRS debt can feel like a burden, especially when it seems like there's no way out. Many people facing tax debt consider bankruptcy an option to start fresh. Does filing for bankruptcy help IRS debt? In this guide, we'll delve into how bankruptcy and IRS debt are connected, providing insights into the options available to individuals in Florida so you can make informed choices about your financial path.

Understanding Bankruptcy and IRS Debt

Bankruptcy is a process meant to offer individuals and businesses a chance for a financial beginning by eliminating or restructuring their debts. It provides an approach to resolving challenges under the guidance of a bankruptcy court. While bankruptcy can benefit handling debt, its impact on IRS debt requires thought.

Types of Bankruptcy

1. Chapter 7 Bankruptcy (Liquidation)

Chapter 7 bankruptcy, or liquidation bankruptcy, involves selling nonexempt assets to repay creditors. The process starts with the debtor submitting a petition to the bankruptcy court, which triggers a stay that puts creditor collection efforts on hold.

After a person files for Chapter 7 bankruptcy, a trustee appointed by the court takes charge of selling off the debtor's assets that are not protected by law. The money from these sales is then divided among creditors based on an order of priority.

In cases involving IRS debt, Chapter 7 bankruptcy can offer relief for types of tax debts and older income taxes that meet specific requirements for forgiveness. Income taxes generally need over three years to qualify for forgiveness, and other conditions must also be met. However, not all IRS debts can be forgiven through Chapter 7 bankruptcy. Debts that cannot be forgiven may include income taxes, taxes related to fraud or evasion, and tax liens placed on the debtor's property.

While Chapter 7 bankruptcy provides a way to deal with overwhelming debts, there is a risk of losing assets that are not protected by law and may be sold to pay off creditors. Therefore, individuals considering Chapter 7 bankruptcy should consider the advantages and disadvantages carefully. Please seek advice from a bankruptcy lawyer to determine the eligibility and explore other options.

2. Chapter 13 Bankruptcy (Reorganization)

In Chapter 13 bankruptcy, also referred to as reorganization bankruptcy, individuals with income have the chance to develop a court-approved repayment strategy to manage their debts over a period typically ranging from three to five years. Unlike Chapter 7 bankruptcy, Chapter 13 allows debtors to keep their possessions while repaying creditors through a payment plan.

Regarding IRS debt, Chapter 13 bankruptcy can be advantageous for individuals dealing with tax liabilities that cannot be discharged or those looking to avoid asset liquidation under Chapter 7. With a Chapter 13 repayment plan, debtors can address IRS debts gradually while retaining ownership of their assets and steering clear of the risk of asset liquidation.

Moreover, Chapter 13 bankruptcy enables debtors to catch up on missed payments for mortgages or car loans and prevent foreclosure or repossession. The repayment plan is customized based on the debtor's income and expenses, making room for payments and paving the way toward financial stability.

In essence, Chapter 13 bankruptcy presents an option for individuals aiming to reorganize their debts. Achieve lasting financial security. Nonetheless, it demands a commitment to sticking with the repayment plan. It may only suit some people's circumstances.

Are you considering Chapter 13 bankruptcy? It's advisable to seek guidance from a bankruptcy lawyer to assess your options and decide on the steps based on your unique situation.

Dischargeable vs. Non-dischargeable IRS Debts

1. Dischargeable IRS Debts

• Older Income Taxes: Chapter 7 bankruptcy might offer relief for income tax debts that meet the criteria for discharge. Typically, income taxes owed for tax years older than three years and meeting requirements may be eligible for discharge in bankruptcy. This means the debtor's responsibility for these tax debts can be erased through bankruptcy.
• Penalties and Interest: In some instances, penalties and interest linked to income tax debts may also qualify for discharge in bankruptcy. However, it's essential to understand that the dischargeability of penalties and interest could differ based on circumstances and relevant bankruptcy laws.
• Tax Debts: Apart from income taxes, certain tax debts could be discharged in bankruptcy under specific conditions. For instance, taxes owed for trust fund recovery penalties resulting from payroll taxes withheld from employees' wages might be eligible for discharge if particular requirements are satisfied.

2. Non-dischargeable IRS Debts:

• Recent Income Taxes: Income taxes owed to the IRS for the three years are typically not dischargeable in bankruptcy. If you owe income taxes for previous years, you are still responsible for paying them after filing for bankruptcy.
• Tax Evasion: Debts from tax fraud or evasion are generally not dischargeable in bankruptcy. Suppose you have engaged in criminal activities related to your tax responsibilities. In that case, you may still be held accountable for these debts regardless of whether you file for bankruptcy.
• Tax Liens: Bankruptcy might not remove tax liens placed by the IRS on your property. While certain IRS debts can be discharged through bankruptcy, any existing tax liens on your assets may persist. You should settle the underlying debt or negotiate with the IRS to satisfy the tax lien.

Understanding which IRS debts can and cannot be discharged through bankruptcy is crucial for individuals looking to address their tax obligations. 

It is recommended to seek advice from a tax lawyer or bankruptcy expert to understand if your IRS debts can be discharged in your case and to consider the best steps forward.

In Summary

Bankruptcy may offer relief for debts. Its impact on IRS debt varies based on factors such as the type of bankruptcy filed, the nature of the tax debt, and one's financial situation. Suppose you're considering using bankruptcy to address IRS debt; speaking with a tax attorney who can assess your circumstances and offer tailored advice is essential. At Florida Tax Lawyers, we specialize in guiding individuals through tax issues, including IRS debt and bankruptcy. Contact us today to arrange a consultation and explore ways to achieve stability.