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Eliminating Tax Debt Through Bankruptcy

In order to be eligible to eliminate tax debt through filing bankruptcy five rules must be met.

  1. The due date for filing a tax return is at least three years ago
  2. The tax return was filed at least two years ago
  3. The tax assessment is at least 240 days ago
  4. The tax return was not fraudulent
  5. The taxpayer is not guilty of tax evasion

As is the case with debts dischargeable through bankruptcy, ownership of certain assets may be a significant obstacle for clients attempting to file a Chapter 7 bankruptcy. Bankruptcy petitioners are allowed to keep "Exempt Property" such as clothing, furniture, appliances, and household goods. Public benefits such as social security, unemployment benefits, veteran's benefits, and worker's compensation are also generally not affected by a chapter 7 bankruptcy filing. However, many clients run into problems when there is a large amount of equity in a house, stock certificates or individual retirement accounts.

Even if you aren't able to get rid of your tax debt fully with a Chapter 7 bankruptcy filing, you may able to discharge some of it, and enter into a more favorable repayment plan for the taxes than you otherwise could outside of bankruptcy in a Chapter 13 or Chapter 11 case. With a Chapter 13 bankruptcy, IRS taxes are rarely discharged but instead repaid through the use of a payment plan that lasts anywhere from three to five years. If your income falls below your State's medium income the repayment term is three years, otherwise five. Quite often the repayment plan Faucette Law Firm attorneys are able to negotiate with the bankruptcy trustees are much less than that actually owed. The primary benefit of a Chapter 13 bankruptcy is that the client does not have to liquidate or sell any assets because the payment plan is backed by the client's income. Additionally, Faucette Law Firm attorneys are able to secure reasonable payment plans through the bankruptcy process for clients that have been rejected by the IRS. Unlike repayment plans with the IRS, interest does not accrue on the tax debt while you are repaying in the chapter 13 repayment plan. This allows clients to pay more on the actual principal as opposed to a good portion of the payments going towards interest and penalties.

Generally, as with other legal issues that can arise in the process of filing a bankruptcy, a Faucette Law Firm bankruptcy attorney has experience working through all of these potential hindrances. If you have a serious tax or financial problem, contact the attorneys and tax professionals at The Faucette Law Firm, LLC for a free consultation.

Journal of Accountancy – Discharging Taxes in Bankruptcy by Donald Ariail, Fred W. Daily Using the Bankruptcy Code to Handle Tax Debts and Stop IRS Collectors, Alicia Faucette

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