Tax debts are one of the few unsecured debts that are usually not dischargeable in Chapter 7 or Chapter 13. If you cannot get rid of your tax debts, is filing a bankruptcy case worth the trouble? The answer to that question depends on your overall financial situation. There are ways to get rid of some tax debts through bankruptcy.
Our Phoenix bankruptcy attorney reviews your specific debts and financial situation to determine the best debt-relief option for you. If there is a way to get rid of your tax debts in bankruptcy, we will find it.
Our Phoenix Tax Debts and Bankruptcy Lawyer Can Help with Personal Income Tax Debts
A Chapter 7 bankruptcy is a liquidation bankruptcy. Any property you own that is not exempt may be sold by the Chapter 7 trustee to pay your unsecured debts. Most Chapter 7 cases filed in Arizona are no-asset cases, meaning that you keep all your property while getting rid of your debts.
Because personal income taxes are usually not dischargeable in bankruptcy, you may continue to owe your tax debt after filing Chapter 7. However, some old tax debts are dischargeable in Chapter 7. We analyze your tax debt to determine if the debt meets the requirements for discharge.
The requirements to discharge personal tax debt in Chapter 7 are referred to as the 3-2-240 Rule:
- The taxes must have become due at least three years before you filed your Chapter 7 bankruptcy petition.
- The tax returns that established the income tax debt must have been filed at least two years before filing bankruptcy.
- The taxing authority must have assessed the taxes at least 240 days before you filed Chapter 7.
If you meet all the above requirements, you might be able to get rid of old tax debt in Chapter 7. Calculating the above periods can be complicated by certain actions you may have taken regarding your tax debt. It is important to work with an experienced Arizona Chapter 7 bankruptcy attorney who understands how to calculate eligibility periods for old tax debt.
Personal Income Tax Debt in Chapter 13
The same rules apply for discharging personal income taxes in Chapter 13. In a Chapter 13 plan, the dischargeable portion of tax debt becomes an unsecured debt. The tax authority receives the same percentage of payment as other unsecured debts, such as medical debts and credit card debts.
The portion of tax debt that is not dischargeable is a priority unsecured debt. Priority unsecured debts must be paid in full through the Chapter 13 plan. Payments are broken up into affordable monthly amounts instead of being due in one lump sum.
Penalties and Interest for Tax Debts
Penalties and interest on tax debts may also be discharged through bankruptcy. If the old tax debt is dischargeable, the penalties and interest on that tax debt are dischargeable. If the tax debt is not dischargeable in Chapter 7, you continue to incur penalties and interest until the tax debt is paid in full.
However, penalties and interest for priority tax debt may be dischargeable in Chapter 13, depending on when you filed the tax returns creating the tax debt. Therefore, filing Chapter 13 might be a better option if you owe significant tax penalties and interest. Get in touch with a CH 13 bankruptcy lawyer in Phoenix to discuss the best bankruptcy options for you.
Contact a Phoenix Bankruptcy Attorney for Help with Tax Debt
An Arizona bankruptcy attorney should review your tax debt carefully to determine if tax debts, penalties, and interest are dischargeable in bankruptcy.
If you have questions about tax debts and bankruptcy, contact Allegiant Law Group by calling 602-562-1000 to schedule a free consultation with a Phoenix bankruptcy lawyer.