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How Does Filing for Bankruptcy Affect Tax Debt

How Does Filing for Bankruptcy Affect Tax Debt?

Milford, NH Resident Weighs His Options

Filing for bankruptcy is a difficult decision, and one that should not be taken lightly.  While under federal bankruptcy law this will stop creditors from chasing you, tax debt is treated differently being considered nondischargeable priority debt.  With exceptions, bankruptcy will not eliminate this type of debt and it is given priority over other claims.  If you have a tax lien against your property, filing for bankruptcy will not remove the lien and the IRS will still have a claim to your property until the debt is paid.

A Milford resident had found himself in trouble with debt and collection agency calls multiplying daily.  Seeing no other alternative, he was considering filing for bankruptcy.  He was also saddled with a hefty tax debt and wondered how this would be affected when filing for bankruptcy.

Removing Tax Debt Through a Bankruptcy

There are certain conditions when a tax debt can be removed through a bankruptcy filing.  This debt must be income tax debt, including unpaid federal and state income taxes.  This cannot be back payroll taxes, including Social Security and Medicare.  The tax debt also must be at least three years old at the time of the bankruptcy filing.  You must have filed the previous two years of tax returns and have done so on time.  Properly filed for, and received, extensions for your return do still qualify as “on time”.  If these requirements are met, tax debt can be removed under the federal bankruptcy code. 

Other Options for Managing Tax Debt

Filing for bankruptcy is not the only option for coping with tax debt.  By contacting the IRS, you may be able to set up installments and a payment plan to pay off the debt.  Other times the IRS may be willing to accept less than the full amount, while forgiving the remaining balance. If the primary reason for filing for bankruptcy is tax debt, these other options may be a better choice in the long run.

With the advice of Merrimack Tax Associates, the Milford resident was able to decide the best course of action for managing his tax debt.

bankruptcy, tax debt, tax penalty