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Filing Bankruptcy and Taxes

(See the special tax disclaimer on the Disclaimers section of this website).

Filing bankruptcy will stop immediately the taxing authorities from garnishing wages, seizing and selling assets, and closing your business. It will also stop them from taking other actions like filing tax liens. Finally, it usually will take the matter out of the hands of the taxing agent with whom you are dealing and put it in the hands of a trained person in the bankruptcy department of the taxing authority, which may defuse a situation where it may seem to have gotten personal.

That being said, this is a very complicated area and depends on, well, a TON of factors, including the type of taxes you owe, the years for which those taxes are owed, who was responsible for paying the taxes, whether the taxes are an automatic lien on any real estate, whether the taxing authority has filed a lien, and whether you have actually filed tax returns on time and, if not, when you filed them. It depends on how much time has gone by between the time the taxes were filed and when they were assessed, and when the bankruptcy was filed.

Finally, it depends on which type of bankruptcy you file. It may depend on whether your ex-spouse filed tax returns for you and you may claim innocent spouse protection. I would advise you to make an appointment with a tax attorney who is knowledgeable in this area and have all of your facts straight regarding the above questions for the appointment. Also, understand that you need to have a copy of all of your tax returns and notices from the taxing authority for any attorney to advise you properly. A change in one variable may mean the difference between what the attorney’s having told being correct or totally wrong. It will not be the attorney’s fault if you provide incorrect or incomplete information.

In general, if you file a chapter 7 bankruptcy and the INCOME taxes are for a tax year that is due and payable more than 3 years ago (for example, after April 15, taxes are deemed due and payable so, after 4/15/06 we are talking about 2002 taxes); AND if the income tax returns were filed more than two years before the chapter 7 bankruptcy filing, then you may be able to discharge those taxes. There also is a specific requirement regarding the number of days before the filing that the taxes were assessed which you must consider to find out whether those taxes are dischargeable.

Also, if a tax lien has been filed, then you have to pay the IRS/SC/NC the value of its collateral (which is everything you own, minus the value of any superior liens), even though the debt is discharged by the chapter 7 bankruptcy. You may have to sue the IRS to figure out the value of what you have to pay the IRS to get rid of the lien. And then, of course, the SC Department of Revenue does not recognize some of these procedures.

These same rules apply to state income taxes.

Sales taxes are NOT dischargeable in bankruptcy. Property taxes for personal property taxes are dischargeable as long as the chapter 7 bankruptcy is filed before the taxes are due and payable.

Regarding withholding taxes: you just have to pay them if you are the “responsible party”.

If you file a chapter 13 bankruptcy there are a few extra rules, but all of the above rules are the same. However, remember that a chapter 13 bankruptcy plan is a way for you to repay your debts. A dischargeable debt in a chapter 13 payment plan is just a type of debt of which you could, if you qualify, pay less than 100%. For example, all of the dischargeable debts listed above, if they were paid in a chapter 13 bankruptcy plan, are the types of debts that you could pay at the same percentage rate as your VISA bill and doctor bill…..at perhaps as low as 1% of the balance. You also would not pay interest in many situations and tax penalties and interest usually stop at the time of the chapter 13 bankruptcy filing.

In brief, the same rules apply if you file a chapter 11 bankruptcy, except you have to pay interest on the taxes, but penalties stop and you do not necessarily have to pay any tax payments until your chapter 11 bankruptcy payment plan is confirmed, or approved, which could take months or even longer.

If you file a chapter 13, you must keep your taxes filed and current for the years you are in the chapter 13 repayment plan or your case can be dismissed. Also, you have to send the trustee a copy of your federal tax return for each year you are in the chapter 13 payment plan. Finally, you must have filed all of your tax returns for a chapter 13 repayment plan to be confirmed.

  • Learn More About Bankruptcy

    If its time to start considering a step toward bankruptcy we're here to help. I have been helping people through the process of filing bankruptcy in South Carolina for over 20 years. We are here for you if you have questions.
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