Student Loans and Bankruptcy

Will The IRS Have A Say In Your Bankruptcy?

28 July 2019

Roy Sanders

Filing for chapter 7 bankruptcy is a big move and one that should be made only after careful consideration. One primary area of concern is how much of your debt can be eliminated with a filing. After all, if you are to make the most of the filing at your bankruptcy law firm, it pays to know what can be included. Tax debts are one of those confusing areas when it comes to what can and what cannot be forgiven with a chapter 7 filing. Read on to find out more about how the IRS rules and the bankruptcy codes could affect your case.

How Bankruptcy Views Tax Debts

It can be a revelation to some filers when they realize how their personal financial situation has suddenly become the business of the bankruptcy trustee after a filing. When you file, you are actually allowing the bankruptcy trustee to oversee your finances by making decisions about what you owe and what debts can be forgiven. If you owe on taxes, you must list them on your debt matrix, right alongside your car loan and credit cards debts. Debts are then assigned a priority rating by the bankruptcy trustee. As you can well imagine, the IRS has a very high standing when it comes to who gets paid first. That means that most, if not all, of your tax debts have to be paid by you. You may have a short grace period during the bankruptcy process, but the debt remains after the bankruptcy is final. If you are entering bankruptcy with a lot of tax debts, your financial situation might only improve marginally once you are out of bankruptcy.

Some Tax Debts Can be Forgiven

Don't lose hope, however. If your tax debts are old enough, they could be forgiven. The rules about the discharge of tax debts are strict and every one of the below requirements have to be met to have them forgiven:

1. You must have filed a return for your most recent tax year. You do not necessarily have to have paid any of the taxes owed, however.
2. All returns in question for any of the below time periods must be free of fraud or tax evasion issues.
3. From the filing date of the return, all taxes owed prior to three years from the bankruptcy filing date may be forgiven.
4. If an extension was filed, the filing date of the extension is used to calculate the three-year mark.
5. All assessments older than 240 days may be forgiven. An assessment is when the IRS sends you a bill for taxes owed.

Taxes and bankruptcy are complex issues and may require the expertise of a bankruptcy lawyer.

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