Income Taxes and Bankruptcy

It is a common misunderstanding that bankruptcy cannot eliminate any tax liability. Although treatment of tax liability is one of the most complicated aspects of consumer bankruptcy law, the Bankruptcy Code does offer many debtors substantial income tax relief. Whether or not your bankruptcy filing relieves your tax debt depends on several factors including the nature and the status of tax liability and the type of bankruptcy proceeding.

In general,  unsecured income taxes that were first due more than three years before the bankruptcy is filed, for which a timely and non fraudulent return was filed, can be discharged in full in any chapter of bankruptcy.

Dischargeable taxes are eliminated in Chapter 7 and are treated as general, unsecured creditors in Chapter 13.   Secured tax liens cannot be discharged in Chapter 7. The secured portion of tax liability must be paid during a Chapter 13, in full and with interest, but without further penalty.

Only individuals, not businesses, can be wiped out, certain taxes through bankruptcy.  The only tax eligible for discharge is federal income tax.

IRS has the power to file a tax lien to make its tax claim against individual’s property.  A tax lien, once filed, becomes a secured lien on all of the taxpayer’s property. If a tax lien is in place prior to your filing bankruptcy, the IRS’s secured tax lien has priority over the bankruptcy filing, and bankruptcy cannot dislodge the lien from the your property. Even property which would otherwise be exempt in a bankruptcy, such as homestead, cannot be sold or transferred without payment of the IRS tax lien. In this instance, bankruptcy provides no tax relief.

Bankruptcy law does not require that you hire an attorney to prepare a bankruptcy petition or to represent you in your bankruptcy case.   However, bankruptcy is a complicated area of the law, and the bankruptcy law gives no special treatment to debtors who file their own petition. The new bankruptcy law makes filing bankruptcy substantially more complicated and the practice of bankruptcy law is therefore more specialized.  CPA Moms astrongly believe that the financial risk of filing your bankruptcy incorrectly is much greater than the amount of a reasonable fee paid to a bankruptcy attorney