WHAT BANKRUPTCY CAN’T DO
For over twenty years, I have helped thousands of people file bankruptcy. I enjoy helping people get out from under crushing debt and to stave off cruel collection agencies.
But there are times when bankruptcy will not help. There are certain kinds of debts that are not affected by filing for bankruptcy. They are not dischargeable – which means they will survive the bankruptcy. When the smoke clears – these debts will still have to be paid.
State and Federal Taxes are these kinds of debts.
Personal income taxes due can be discharged in either of the individual bankruptcies available – Chapter 7 liquidation and Chapter 13 consolidation or repayment. But your taxes can be discharged only if they can make it over four hurdles:
- The taxes had to have been due at least three years before you file for bankruptcy. Earlier this year taxes were due for 2015. Counting backwards that means any taxes owed for 2015, 2014 and 2013 are not discharged if you file for Chapter 7.
When does the clock start ticking? That is an important question that will affect whether or not the taxes will discharge. When is the exact date? Good question. When you file Chapter 7 bankruptcy the IRS will fight like a tiger to have your taxes ruled non-discharged. They have a lot of weapons at their disposal.
Remember that Tax Day is April 15th. If someone filed on April 14th of this year, their 2012 are not yet three years old.
Did you file for an extension for that year? Then the deadline is three years from the extension, not April 15th.
- You will have had to file your tax returns for the years in question at least two years before you file your bankruptcy. If you owe for 2012 but you just filed them this past spring, they will survive the bankruptcy.
The key words are “you” and “file”. If you owe for 2010, but Substitute for Return was filed by the state or the IRS and NOT by you directly, that doesn’t count. Always check to make sure it is not a Substitute for Return. This is the most successful trap in the government’s bag. “I think I filed in 2010,” is not going to help – make sure YOU filed your tax returns.
- The taxes you owe will have to have been assessed against you for over 240 days. You just found out you owe for 2010 taxes last week? They will survive if you file now. This is rarely a problem for my clients – by the time they come to see me they will have been fighting the IRS for years.
- No tax fraud. This is also rarely a problem for my clients. As I tell them, “If you are being accused of tax fraud you would know about it and have a lot more problems than you have now!” If there is any tax fraud I send them to a tax attorney. Then they can come back for the bankruptcy.
Some clients do not have a problem with their tax debt surviving their bankruptcy. “I can handle the taxes if you can get these credit cards off my back.” That has been the case many times, but occasionally I see someone that only needs to wait a few months.
“It’s July, but if you wait until September it’s possible your taxes will discharge too. Would you like to wait?”
These rules apply to income taxes ONLY. Sales tax from your business, employment tax, use tax, etc. are NOT subject to these four criteria. Those kinds of tax debt WILL NOT discharge if you file a Chapter 7.
However, ANY non-dischargeable taxes (income, sales, employment, use, etc.) owed can be paid in a Chapter 13. In some jurisdictions (like mine), taxes are not allowed to be paid interest. Interest continues to accrue in the three-to-five years you are paying into your Chapter 13 Plan. Depending on the amount owed, you may owe MORE at the end of the Plan than at the beginning – because of interest.
As said above, I have had clients say, “I can deal with that, as long as they stop collecting it in the meantime. If I can get the credit cards, the medical bills AND the IRS off my back for five years and all I’ll have is the IRS when it’s done, that okay.” I still have them sign an acknowledgment advising them about the interest.
Can the IRS or state still take your tax refund while you are in a Chapter 13? Tricky question. And it depends on the district in which you live. In my practice, the answer is “No, they are not supposed to”. Usually the Chapter 13 Trustee takes the refund, so there is not much to be gained by fighting over it – let the Trustee and IRS duke it out instead. If you live in an area where you are allowed to keep some of your refund, it is worth the fight. In my district we are very lucky – the IRS and Illinois Department of Revenue are wonderful to work with and tax return captures are rarely a problem.
What about Real Estate Taxes? Ask your bankruptcy attorney about how your district handles those. Where I am – real estate taxes survive a Chapter 7 if you are keeping the property. If you are surrendering the real estate the taxes go with the land. You might still keep getting bills from the county, but ultimately it is the responsibility to the mortgage company (or individual) to which you surrendered the property.
Whether you can pay back real estate taxes in a Chapter 13 Plan again depends on your jurisdiction. Ask your bankruptcy attorney how real estate taxes are handled in a Chapter 13.
As always, if you have tax issues and wonder if bankruptcy will help, consult a local skilled bankruptcy attorney. Consider this a guideline only.
I’ll discuss more debts that are non-dischargeable next time.
Copyright 2016 Michael Curry
About the author: Michael Curry of Curry Law Office in Mount Vernon, Illinois has helped thousands of individuals, family and small businesses in southern Illinois find protection under the Bankruptcy Code for almost twenty-five years. He is also available to help individuals and families with their estate planning (wills, power-of-attorney) and real estate and other sales transactions.
He is also the author of books on finance and bankruptcy available on Kindle through Amazon!
Whether you live in Mount Vernon, Salem, Waltonville, Woodlawn, Lawrenceville, Centralia, Louisville, Xenia, Grayville, Effingham, Dieterich, Vandalia, McLeansboro, Dahlgren, Albion, Flora, Clay City, Kinmundy, Chester, Sparta, Olney, Mount Carmel, Nashville, Fairfield, Cisne, Wayne City, Carmi, Grayville, or anywhere in Southern Illinois call Curry Law Office today at (618) 246-0993 and Finally Be Financially Free!
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