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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

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