When you declare bankruptcy, tax debt relief will depend on the type of bankruptcy that you file. Some taxes may be forgiven, while others are still required to be paid. There are certain stipulations that must be met with any type of bankruptcy. Consult with your bankruptcy attorney, to get a clear understanding of exactly what taxes you will have to pay after your bankruptcy is filed.
Chapter 7 Bankruptcy
It is possible to discharge federal income taxes under a Chapter 7 bankruptcy. There are certain requirements that you must meet in order to be eligible for tax relief under Chapter 7. The requirements are:
If you have an existing federal tax lien, it cannot be discharged under Chapter 7.
Chapter 13 Bankruptcy
It is usually not possible to discharge federal income taxes under a Chapter 13 bankruptcy, because this type of bankruptcy is a reorganization, where your debt payments are adjusted. The typical term of repayment under Chapter 13 is within three-to-five years after the bankruptcy is filed.
Your reorganization plan will place a higher priority on tax debts. You must prove that you have filed your tax returns for the past four years in order for the reorganization plan to take effect. If you are unable to show proof, you may have to pay the taxes in full without benefit of the Chapter 13 payment plan.
Resolving Tax Debts
If you are unable to have a portion or all of your tax debt discharged by the bankruptcy, you will have to make arrangements to pay the debt. This can be complicated, since traditional lenders will usually not extend any credit until a bankruptcy has been discharged. Some lenders will not consider you for a loan until the discharge has been in effect for a minimum of two years. You will have to find a way to pay the taxes that you owe, or face the possibility of having a tax lien filed.
You can try to sell some of the assets that you were able to retain after filing bankruptcy, and use the proceeds to payoff the tax debt. For example, consider downsizing your car to an older model. Another option may be to cash out a portion of your retirement account to cover the taxes. Even if you have to pay a penalty for early withdrawal, you will be able to clear your tax debt and avoid any further complications.