Whether you are filing a Chapter 7 bankruptcy in NYC, or a Chapter 13, one benefit of taking this step is that you can be shielded from the IRS. Bankruptcy cannot eliminate most types of tax debt, but there are two ways that it can help you get some relief from IRS collections. Here’s what you need to know.
The Automatic Stay
As soon as your bankruptcy is on file, an automatic stay is created that acts as a shield between you and creditors. This stay prevents any creditor, even the IRS, from calling, sending you letters, or contacting you in any way until after your bankruptcy is done. During the bankruptcy process, your attorney will handle any communication from creditors who are breaking the law by continuing to contact you.
This automatic stay extends to debts that aren’t eligible to be discharged, such as IRS debt. If you are in the process of a bankruptcy, you will get some peace while your financial situation is sorted out. The stay ends when the case is closed and discharged, or dismissed without discharge.
A Chapter 7 bankruptcy usually takes a few months to complete. A Chapter 13 bankruptcy is considered active as long as you are making payments on the debts – therefore, outside of any tax debt that was part of the bankruptcy, and excluding any tax debt you incur in the future, the IRS cannot continue to come after you for old tax debt while you pay on your Chapter 13.
Dischargeable Income Tax
There are some types of income tax debt that can be discharged. This tax debt must be at least three years old, and you must have filed your taxes on time in the year that you want discharged. (You can’t file several years all at once to get them into the bankruptcy.) The IRS has to have assessed the tax at least 240 days ago, and there can be no fraud or tax evasion involved.
A Chapter 7 bankruptcy will discharge this type of income tax debt, wiping it away for good. A Chapter 13 will simply create a more affordable consolidated payment plan. Your bankruptcy trustee will pay the IRS their share of your regular payment.
Which Type of Bankruptcy Is Best for Tax Debt?
Both types of bankruptcy chapters have their pros and cons. If you need help getting all your debts paid on time and want to do away with the IRS’ hassling phone calls and letters, then a Chapter 13 may be right for you. If you qualify for a Chapter 7, however, it may be best to go that route – you’ll be able to wipe out the income tax debt and never pay on it again.
However, keep in mind that the Chapter 7 only allows you to wipe away income tax debt that is at least three years old, and meets a wide array of other standards. With a Chapter 13, you can usually have a little more leeway on what you include in your payment plan. So if your tax debt is more recent, the Chapter 13 may be your only option.
When taxes start to get involved in your bankruptcy, it can get complicated fast. The IRS has a lot of loopholes they can use to ensure that you are stuck paying your tax debts. If you want to ensure that you will be able to eliminate tax debt, call our office today to schedule an appointment. We specialize in bankruptcy, and have all the experience necessary to tackle this particular situation. Call 212-244-2882 today.