As a bankruptcy lawyer TN trusts, one of the most common questions I get asked every tax season is, ‘Can bankruptcy get rid of my tax debt?’ First of all, if you have tax debt, know that you’re not alone, and there’s no reason to feel shame. Tax debt is an issue that affects more folks than you may realize.
Collectively, Americans owe billions in back taxes. According to recent data and estimates from 2020, outstanding tax debt in America hovered around $527 billion—roughly $381 billion in federal tax debt, reported by the IRS, and $146 billion in state tax debt. We have reason to believe that figure has only increased in the past year.
So, can bankruptcy get rid of tax debt? Often the answer is yes, but it depends on your situation.
Three things to consider if you have tax debt and are considering bankruptcy:
1. The type of tax debt you have
For tax debt to be completely dischargeable through a Chapter 7 bankruptcy, the debt has to be for simple income tax. If your tax debt is more complicated, like capital gains or property tax debt, bankruptcy may not be able to wipe it out all together. However, if this is your situation, it doesn’t mean you’re out of options, a Chapter 13 bankruptcy might be right for you.
2. The age of your tax debt
To get rid of your tax debt completely, it needs to be at least three years old. Which sounds straightforward, but figuring out the age of your debt can be a bit tricky. The tax year is different from a normal year and Tax Day is not always April 15.
In addition, if you requested an extension, the three-year rule begins when you filed, which means it could delay the time you have to wait to discharge the debt in a bankruptcy. For example, if you got permission to file late and then turned in everything on June 15th, 2017, you’ll be able to discharge the debt after June 15th, 2021 or later.
If this all sounds confusing, you’re not alone. The math involved in this rule can confuse anyone. One of our experienced bankruptcy lawyers can help you determine how old your tax debt is in a FREE consultation.
3. Whether you filed on time
The third factor to discharge tax debt through bankruptcy is whether you have filed on time. Don’t worry if you’ve asked the IRS for an extension in the past, that is completely fine. As long as you filed by the extension deadline you still filed on time.
However, if you asked for an extension, it will delay how soon you can discharge the debt in a bankruptcy, since an extension makes the debt more recent than the actual tax season deadline.
What If I Don’t Qualify to Get Rid of Tax Debt Through Bankruptcy?
If you’ve read the list above and realize your tax debt doesn’t meet these requirements, it doesn’t mean you’re out of options. At Darrell Castle & Associates, we often help folks whose tax debt is not within the three year timeframe through a Chapter 13 consolidation plan.
A Chapter 13 bankruptcy allows you to include more recent tax debt by setting up a monthly payment plan specific to your situation.
You may have heard of payment plans directly with the IRS, but keep in mind, a Chapter 13 bankruptcy goes a step further: it allows you to include all of your other debt. Which means along with your tax debt you can include your medical bills, credit card debt, and the like in the same payment plan.
Contact a bankruptcy lawyer Memphis trusts today for FREE.
If you’re ready to take control of your tax debt, contact us online or call (901) 327-2100 to speak with one of our experienced bankruptcy lawyers today. We’ll talk through your situation, answer any questions you may have, and discuss your options – no strings attached.
And if you’re one of the lucky ones getting money back from the government this tax season, consider using that refund to buy your financial freedom and use your refund to file for bankruptcy. In my opinion, if you’re struggling with debt there’s no better use of a tax refund than that.
Give us a call today and find out how we can help you get your financial life back on track, so you can move forward into a debt-free future.