As Tax Day quickly approaches, taxpayers throughout the country may find themselves facing an unmanageable tax bill. A large bill from the Internal Revenue Service (IRS) may leave you wondering: is bankruptcy an option?
The answer, like many things in the legal world, is maybe.
A bit on bankruptcy: First, let us take a step back and discuss some of the basics of bankruptcy. Individuals usually file for one of two forms of bankruptcy: Chapter 7 or Chapter 13. A Chapter 7 petition for relief through bankruptcy generally leads to the discharge of debt. This means the court essentially orders creditors to forgive the debts. It is possible for the court to allow the discharge of tax debt with Chapter 7. The court will require the taxpayer to meet certain criteria to qualify, including a history of filing returns.
In contrast, a Chapter 13 bankruptcy is a repayment plan. As such, the court does not discharge tax debt. Instead, the court would agree to a new plan to pay off the debt over a period of time — often spanning three to five years and involving court oversight.
Clarification on the treatment of tax debt: There are certain types of tax obligations that generally do not qualify for relief through bankruptcy. These can include taxes debts that are the result of unfiled tax returns and those the IRS deems the result of tax fraud.
The rules regarding taxes and bankruptcy are complex. The IRS is strict in its requirement. For example, a failure to continue to file or request an exchange of a due date can result in difficulty receiving approval for relief.
Even if bankruptcy does not discharge your tax debt, it can apply to other forms of debt. This can allow more flexibility and help you get on with your life. An attorney experienced in these matters can review your situation and discuss the impact of bankruptcy on your tax obligations.