The thought of bankruptcy can be daunting for anyone. However, for those with tax debt, bankruptcy may be a viable option to eliminate or manage their debt. Can bankruptcy stop the IRS from collecting tax debt? Well, it is important to understand how bankruptcy affects tax debt collection, as the rules and regulations can be complex and confusing. This blog post will provide an overview of the different types of bankruptcy, the automatic stay, discharge ability of tax debt, priority of tax debt in bankruptcy, and offer in compromise.
Types of Bankruptcy
There are two main types of bankruptcy that individuals can file for: Chapter 7 and Chapter 13 bankruptcy. Chapter 7 is often referred to as a “liquidation” bankruptcy because it involves the liquidation of assets to pay off creditors. Chapter 13 bankruptcy, on the other hand, allows the debtor to keep their assets and create a repayment plan to pay off creditors over a set period of time.
When it comes to tax debt, both types of bankruptcy can be effective. However, there are some key differences to consider. In Chapter 7 bankruptcy, certain taxes may be discharged if they meet specific criteria. In Chapter 13 bankruptcy, tax debt is included in the repayment plan, allowing the debtor to pay off the debt over time.
The Automatic Stay
One of the most significant benefits of filing for bankruptcy is the automatic stay. The automatic stay is a provision that stops all collection activity by creditors, including the IRS. This means that the IRS cannot garnish wages, levy bank accounts, or take any other collection action while the automatic stay is in effect.
However, there are some exceptions to the automatic stay when it comes to tax debt collection. The IRS can still audit the debtor during bankruptcy, and they may also file a proof of claim to collect any taxes owed. Additionally, the IRS can still collect taxes that are not dischargeable in bankruptcy, such as trust fund taxes or taxes for which the debtor did not file a return.
Dischargeability of Tax Debt
Not all tax debt can be discharged in bankruptcy. In order for tax debt to be dischargeable, it must meet certain criteria. The tax debt must be income tax debt, and the debtor must have filed a tax return for the debt at least two years prior to filing for bankruptcy. Additionally, the tax debt must have been due at least three years prior to filing for bankruptcy, and the IRS must not have assessed the debt within the past 240 days.
There are also some types of taxes that are not dischargeable in bankruptcy, such as trust fund taxes (taxes withheld from employees’ wages) and taxes for which the debtor committed fraud or willful evasion. It is important for debtors to consult with a bankruptcy attorney to determine whether their tax debt is dischargeable in bankruptcy.
Priority of Tax Debt in Bankruptcy
If tax debt is not dischargeable in bankruptcy, it will be given priority over other debts in the bankruptcy process. The priority rules for tax debt in bankruptcy are complex and depend on the type of tax debt and when it was incurred. Generally, priority tax debt must be paid in full before any other debts can be paid.
If a debtor has both dischargeable and non-dischargeable tax debt, the non-dischargeable debt will be given priority and must be paid in full before any dischargeable debt can be paid. This can be a complicated process, and it is important for debtors to work with a bankruptcy attorney to ensure that their tax debt is prioritized correctly.
Offer in Compromise
An offer in compromise is a settlement option offered by the IRS that allows debtors to settle their tax debt for less than the full amount owed. This can be a useful option for debtors who are unable to pay their tax debt in full. However, an offer in compromise must be approved by the IRS, and the debtor must meet certain criteria to be eligible.
If a debtor is considering filing for bankruptcy, an offer in compromise can still be used to settle tax debt. However, the process can be more complicated and may require the approval of both the IRS and the bankruptcy court. Additionally, the debtor may need to make a lump-sum payment or set up a payment plan to pay off the offer in compromise.
In conclusion, bankruptcy can be a useful tool for managing tax debt. However, the rules and regulations surrounding bankruptcy and tax debt can be complex and confusing. It is important for debtors to consult with a bankruptcy attorney to determine the best course of action for their specific situation. By understanding the different types of bankruptcy, the automatic stay, dischargeability of tax debt, priority of tax debt in bankruptcy, and offer in compromise, debtors can make informed decisions about their financial future.
Q1. Can filing for bankruptcy stop the IRS from collecting tax debt?
A1. Yes, filing for bankruptcy can temporarily halt the IRS from collecting tax debt. Once the bankruptcy proceedings begin, the IRS is required to stop all collection activities, including levies and garnishments.
Q2. What type of bankruptcy should I file to stop the IRS from collecting tax debt?
A2. Generally, Chapter 7 and Chapter 13 bankruptcies can stop the IRS from collecting tax debt. However, the specific circumstances of your situation will determine which type of bankruptcy is appropriate.
Q3. How long will the IRS stop collecting tax debt during the bankruptcy proceedings?
A3. The IRS will be prohibited from collecting tax debt during the bankruptcy proceedings. However, once the bankruptcy case is closed, the IRS can resume collection activities.
Q4. Are all tax debts eligible for discharge in bankruptcy?
A4. No, not all tax debts are eligible for discharge in bankruptcy. Tax debts that are less than three years old or are associated with fraudulent or willful tax evasion cannot be discharged.
Q5. Can filing for bankruptcy eliminate all my tax debts?
A5. No, not all tax debts can be eliminated through bankruptcy. Taxes owed for the current year and the previous three years cannot be discharged, as well as any penalties associated with the tax debts.
Q6. Can I file for bankruptcy if I have a payment plan with the IRS?
A6. Yes, you can file for bankruptcy even if you have a payment plan with the IRS. However, the payment plan will be terminated once the bankruptcy proceedings begin.
Q7. Will filing for bankruptcy affect my credit score?
A7. Yes, filing for bankruptcy will negatively impact your credit score. However, it may be a necessary step to resolve your tax debt issues.
Q8. Will I lose my assets if I file for bankruptcy?
A8. It depends on the type of bankruptcy you file and the specific circumstances of your situation. In a Chapter 7 bankruptcy, some assets may be sold to pay off outstanding debts, while in a Chapter 13 bankruptcy, you can keep your assets but must make payments to creditors.
Q9. Can I file for bankruptcy for tax debts owed to state tax authorities?
A9. Yes, you can file for bankruptcy for tax debts owed to state tax authorities in addition to federal tax debts.
Q10. Can I negotiate with the IRS to settle my tax debt instead of filing for bankruptcy?
A10. Yes, you can negotiate with the IRS to settle your tax debt through an offer in compromise or installment agreement. However, bankruptcy may be a better option if you cannot afford to pay the tax debt in full.
- Bankruptcy: A legal process that allows individuals or businesses to eliminate or repay their debts under the protection of the federal bankruptcy court.
- Tax debt: Unpaid taxes owed to the Internal Revenue Service (IRS) or other tax authorities.
- Chapter 7 bankruptcy: A type of bankruptcy that allows individuals or businesses to discharge most of their debts, including some tax debts.
- Chapter 13 bankruptcy: A type of bankruptcy that allows individuals with regular income to reorganize their debts and repay them over a period of three to five years, including some tax debts.
- Automatic stay: A provision of bankruptcy law that stops most collection activities, including those by the IRS, as soon as a bankruptcy case is filed.
- Tax lien: A legal claim by the IRS against a taxpayer’s property for unpaid taxes.
- Levy: A legal seizure of a taxpayer’s property or assets by the IRS to satisfy a tax debt.
- Priority tax debt: Tax debts that are given priority over other debts in bankruptcy, such as income taxes that are less than three years old.
- Non-priority tax debt: Tax debts that are not given priority in bankruptcy, such as older income taxes or payroll taxes.
- Dischargeable debt: Debts that can be eliminated in bankruptcy, including some tax debts.
- Non-dischargeable debt: Debts that cannot be eliminated in bankruptcy, including some tax debts such as those related to fraud or willful evasion.
- Offer in compromise: A settlement agreement with the IRS that allows taxpayers to pay a reduced amount to resolve their tax debt.
- Installment agreement: A payment plan with the IRS that allows taxpayers to pay their tax debt over time.
- Collection due process hearing: A hearing that allows taxpayers to challenge the IRS’s collection actions, including levies and liens.
- Bankruptcy trustee: A court-appointed official who oversees a bankruptcy case and administers the debtor’s assets.
- Exemptions: Certain property or assets that are protected from creditors in bankruptcy, such as a primary residence or personal property.
- Means test: A calculation that determines whether an individual or business qualifies for Chapter 7 bankruptcy based on their income and expenses.
- Dismissal: A decision by the bankruptcy court to end a bankruptcy case, which can occur if the debtor fails to meet certain requirements or obligations.
- Reaffirmation agreement: An agreement between the debtor and creditor that allows the debtor to keep certain property, such as a car or home, in exchange for continuing to make payments on the debt.
- Bankruptcy discharge: A court order that eliminates certain debts and releases the debtor from liability for those debts.
- IRS Tax Debt: IRS Tax Debt refers to the amount of money owed to the Internal Revenue Service (IRS) by individuals or businesses as a result of unpaid taxes, penalties, or interest. This debt can accrue over time and can result in legal action by the IRS if not paid.
- Bankruptcy filing: Bankruptcy filing refers to the legal process of an individual or company declaring that they are unable to pay off debts and requesting protection from creditors. This can involve liquidating assets, restructuring debt, and potentially discharging certain debts entirely.