You may have heard that a bankruptcy filing can assist you in discharging some of your excess debts. But you may be unsure as to whether it can get you out of your tax obligations. Continue reading to learn if bankruptcy proceedings can eliminate your tax debt and how an experienced Louisville, Kentucky consumer bankruptcy lawyer at Schwartz Bankruptcy Law Center can help you navigate your petition.
What is a tax debt versus a tax lien?
For one, tax debt is considered the state and federal income tax returns that you owe to the state of Kentucky and the Internal Revenue Service (IRS), respectively. Secondly, a tax lien is considered a legal judgment against your property to fulfill the tax obligation that you owe to the state of Kentucky or the IRS.
With that being said, a tax debt may be eligible for a bankruptcy discharge, while a tax lien may not. This is because the Kentucky bankruptcy court bars the IRS from any collection activities, such as taking money from your bank account or seizing your personal property, among other things. This is all while your tax lien remains on your property, so you will be required to pay it off if you wish to sell your property in the future.
Can a Chapter 7 and Chapter 13 bankruptcy eliminate my tax debt?
Put simply, both Chapter 7 and Chapter 13 bankruptcy allow your tax debt to be eliminated. In a Chapter 7 bankruptcy, you may be granted a discharge if you can prove the following criteria as true:
- Your tax debt is not due to fraud penalties, payroll taxes, or anything outside of state and federal taxes.
- Your tax debt is from at least three years before your bankruptcy filing date.
- You filed a tax return at least two years before your bankruptcy filing date that was not late or past extensions.
- You did not participate in any fraudulent activity to willingly avoid paying your taxes.
And in a Chapter 13 bankruptcy, your nonpriority tax may be considered an unsecured debt that gets discharged. This is so long as you meet criteria similar to that of a Chapter 7 bankruptcy. In addition, you may be able to reap the following benefits:
- You may use your established repayment plan to pay off your tax debt that cannot be discharged.
- You may be eligible to discharge your old taxes and tax penalties.
- You may be eligible to remove your tax liens.
- You may be clear from any additional tax consequences.
You must make a valiant effort toward eliminating your debts, especially that of your income taxes. Reach out to a skilled Louisville, Kentucky consumer bankruptcy lawyer at Schwartz Bankruptcy Law Center to learn how to get started on your petition.